FTC served its justice: AdvoCare is banned from multi-level marketing because of its pyramid scheme practices, and it owes the FTC $150 million. Two of their top-level reps are also banned from multi-level marketing for making misleading income claims. (And a case is continuing against two more.)
To be a pyramid scheme, a multi-level marketing company has to emphasize recruitment as the only legitimate way to earn money through the business model.
The converse implies that reps who sell products and make a profit from product sales, emphasizing this over recruitment, are in a legitimate MLM model.
A study of MLM income disclosure found that 80% of reps are in the bottom tier of their MLM and make $0 in revenue. If you don’t recruit, you don’t earn. But once you build that downline, you can jump to a higher tier in the business and typically start making a few hundred dollars annually. Or you can get lucky and make it to the top, siphoning off others’ sales.
The FTC has hit more than AdvoCare for being a pyramid scheme.
Let’s take a look at the irony of Herbalife’s settlement against the FTC for its pyramid scheme allegations. According to the FTC, it “charged that the multi-level marketing company’s compensation structure was unfair because it rewards distributors for recruiting others to join and purchase products.”
Have you ever known a multi-level marketing company not to encourage this? They must be a rare breed.
Most companies (67%, according to my research) have personal volume or recruitment requirements on their income disclosure statements to qualify distributors as eligible for commission. Both of these reward recruitment and selling products to your downline, incentivizing distributors for recruiting others who will buy $100 of product a month.
Then there’s this juicy ruling against Herbalife: “The company will now differentiate between participants who join simply to buy products at a discount and those who join the business opportunity.”
About one third of income disclosure statements I studied had a disclaimer somewhere that overall earnings may be low because some people join for a discount. They are counted in the same tier as those who join to make money, intentionally obfuscating a company’s data with this claim.
If Herbalife set a precedent, the FTC has a lion’s share of MLM companies it could crack down on. If you do a breakdown of a company’s earnings, it seems like you can often catch wind of pyramid scheme practices.
It’s not just the FTC that is attempting to hold some MLMs accountable for their business model; Washington state attorney general has also filed a lawsuit against clothing MLM LuLaRoe, alleging the company is an illegal “pyramid scheme”.