Multi level marketing plans are not necessarily illegal, however according to the FTC, pyramid schemes are illegal in many states. The difference between a multi level marketing plan and a pyramid scheme is that the emphasis on the illegal pyramid scheme is to reward members for recruiting new members in the form of “downline residual income”
This practice can seem very appealing to new recruits because the promise of residual income is very tempting. This type of multi level marketing plan uses a product of some sort as a way to make the plan seem legitimate. The residual income is the bait and the product is an irrelevant part of the exercise in terms of selling it to people that actually want and need the product.
The end consumers of the products that are marketed to, using a “pyramid style multi level marketing plan” are rarely the targeted audience – the end consumer who may want the product. Instead the targeted audience is the actual downline and this specific fact, makes it defined as a pyramid scheme.
The reason the FTC cites that a pyramid scheme may be illegal in your state, is because typically this type of plan creates money for the originators of the scheme, while the people in the downline discover as the scheme progresses that there are less and less available people to recruit. So it is, what the “stock market people” call, a zero sum game. (For every winner there is a dozen losers)
I am not in to multi level marketing, nor do I promote it, however it is only fair to note, that all markets are limited and subject to saturation. Eventually, even a legitimate product being sold in a traditional sense will have some sort of limitation in terms of available buyers in a given period of time. This is not a criticism of the FTC’s efforts as they are trying to help and inform people that may lose money joining such schemes.
A multi level marketing plan is not illegal, unless it qualifies as a pyramid scheme. There are legitimate multi level marketing plans out there that reward their members according to the amount of sales made and this is the type of business model that is legal and works well for certain types of sales oriented people.
As the FTC states, ultimately, they cannot advise people on whether a scheme is or is not a pyramid scheme, and it is up to the individual to decide what is best for them. However, I do note, that one of the FTC’s suggestions makes very good sense. NEVER sign a contract or legal document that commits you in any way. As Sean Connery said in a really cool movie I watched recently (again) “First we try…then we trust”