FTC: MLM companies with little to no retail activity are illegal
Retail sales requirements within an MLM opportunity is perhaps the most decisive issue facing the industry today.
Proponents of pyramid schemes argue that affiliate purchases of product should count as retail sales. I myself argue that to permit as much would open door for product-based pyramid schemes to operate freely.
This stance is strongly rooted in the definition of an MLM pyramid scheme which, regardless of the company, has commonality with respect to a lack of retail sales.
If you start trying to change the definition of a retail sale instead of encouraging retail sales activity itself, you’re just trying to make excuses for pyramid schemes.
I’ve held this opinion for years here at BehindMLM and it forms the base of pretty much every MLM review I’ve written.
On December 15th the FTC published an article that all but confirms retail sales are indeed only sales to non-affiliates.
Penned by Lesley Fair, a senior FTC attorney, the article in question is titled “Dismantling a pyramid: Lessons from the Vemma settlement”.
Although not explicitly directed at anyone in particular, to me it reads like a directive aimed squarely at the MLM industry itself.
Fair begins by going over the FTC’s allegations against Vemma. Namely that it was a pyramid scheme with little retail activity taking place.
According to the FTC’s complaint, rather than marketing the company’s health drinks to the general public, the defendants encouraged participants to qualify for bonuses by buying products themselves and recruiting others to do the same.
The result, the FTC charged, was a classic pyramid scheme that compensated participants mainly for enrolling others in the network, rather than for retail sales based on legitimate consumer demand for Vemma’s beverages.
In stopping Vemma from paying affiliates to recruit new affiliates, Fair claims the settlement
shifts the focus away from signing up new recruits and puts it back where it belongs: on selling products to people who aren’t part of the network structure.
By doing this, the company incentivizes sales over recruitment.
Couldn’t be more clearer.
Are the Vemma settlements, the FTC’s $200 million Herbalife order, and the recent action against Fortune Hi-Tech Marketing (FHTM) striking a familiar chord?
They should because … the raison d’être for any legitimate business is to sell products to people who aren’t affiliated with the company.
This isn’t just a theoretical point. An MLM’s compensation plan should reward real sales to customers outside the network.
That’s not how Vemma and Herbalife operated, and the FTC alleged that both companies ran afoul of the law in different ways.
The FTC orders require Vemma and Herbalife to change their business models to comply with the law, and given their different business structures, use different remedies to reach that result.
What other MLMs do will depend on their structure and circumstance. But here are two key features that the Vemma and Herbalife orders have in common.
Both companies will have to distinguish between the people who join just to buy the product vs. participants who join to make money – and they must track those sales separately.
And both will have compensation schemes that incentivize sales to people outside the network instead of recruitment of new participants.
Again, couldn’t be clearer.
As per the FTC, retail sales in MLM are defined as sales to non-affiliates. And if your company has little to no significant retail activity taking place, it’s a pyramid scheme.
Oh and if you’re in an MLM company purposeful avoiding the US, the FTC’s clarification on this matter should make it abundantly clear why. Ditto anyone campaigning to have the definition of retail sales legally changed.
The exception would be a Ponzi scheme, save for the fact each and every MLM Ponzi scheme shut down in the US has had a pyramid scheme component.
Looking forward, this is the most recent statement by the FTC regarding pyramid schemes and retail sales in the MLM industry. Personally, I think it’s great to see common-sense has prevailed.
I’ll certainly be referencing this article any time someone tries to argue affiliate purchases are retail sales or that retail activity doesn’t matter. I suggest you do the same.