Network Marketing (MLM) vs. Illegal Pyramid Scheme

I get asked quite often, the difference between network marketing (MLM) and illegal pyramids. Here are the qualifiers as detailed on various State Attorney General brochures and web sites. Check with your State AG to see if they have a brochure or web site.

What is Network Marketing (MLM)?

Wikipedia describes network marketing as “a marketing strategy that compensates promoters of direct selling companies not only for product sales they personally generate, but also for the sales of others they introduced to the company. The products and company are usually marketed directly to consumers and potential business partners by means of relationship referrals and word of mouth marketing.” The roots of network marketing were formed in the late 1800’s, but the first true multi-level marketing companies emerged in the 1900’s, the most famous of these is Amway. Network marketing was ruled to be a completely legal form of business by the U.S. Federal Trade Commission in 1979. It has also been ruled legal in over 100 other countries. There are currently many thousands of network marketing companies throughout the world.

What Is An Illegal Pyramid?

An illegal pyramid scheme is a form of multi-level marketing where the marketing of a product is only of secondary importance, or may not be done at all. To join, you must pay some type of initial investment, which gives you the right to recruit others into the company. For each person you bring into the company, you receive money, or other bonuses. Thus your earning potential depends primarily on how many people you sign up, not how much merchandise is sold. One of the easiest ways to identify an illegal pyramid scheme is that they lack a product all together or the product is not something that people would purchase, without the hope of making a bunch of money. In other words, there aren't any customers.

Under Washington State law, if a business venture meets all three of these descriptions, it is an illegal pyramid (check with your State Attorney General):

1. You must make an investment to get the right to recruit others into the program (usually large and you get nothing in return). (A starter kit or administration fee is typically not considered an investment to recruit)

2. When you recruit another person into the program, you receive what the law calls "consideration." That usually means money, but can be anything of value. (If they are purchasing a product or service package and receiving a commission on that, it's okay.)

3. Your new recruits must make an investment to get the right to recruit, and they receive "consideration" for getting other people to join. Remember that all three of these requirements must be met for the venture to be illegal.

What are the penalties for involvement in an illegal pyramid scheme?

Anyone participating in such a scheme is violating the state Chain Distributor Scheme law (WA), and is subject to penalties of up to a $2,000 fine, plus restitution to any injured consumers, and charges for court and attorney fees. If your company meets the criteria for a legal MLM company, then you can use this information to prove to prospects that your company is not an illegal pyramid.