Pyramid Scheme or Legal MLM: How to tell the difference

by louabbott on October 20, 2009

The question comes up all of the time for network marketers, “Is this one of those MLM pyramid deals?”

The fact is, most people do not really understand the difference between a illegal pyramid scheme and a legal “MLM,” multilevel marketing or network marketing business opportunity.  Even most journalists writing on the subject do not understand the differences.

The reason is that it is not as simple as one might first expect. I used to think that if there were products changing hands, it was legal.  If there was only money changing hands, it was illegal.  While the latter is certainly illegal, a product alone will not necessarily legitimatize an illegal scheme.

On this page is a video recording I did a while back that not only explains the difference in a way anyone can understand, but it also explains a concept that can help you quantify the “grey areas.”

I guarantee that you have never seen it explained like this…

Part I on this page is about 8 minutes. Watch it carefully, then move on to Part 2. Together, they will help you more fully understand and explain what is a legal MLM and what is not, AND what is a profitable and smart MLM, and what is a scam.

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{ 24 comments… read them below or add one }

Faust May 24, 2012 at 9:00 am Thumb up 1 Thumb down 1

Auto ship = run like hell.

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Ravi K April 10, 2012 at 5:49 am Thumb up 2 Thumb down 0

What I don’t understand is why we need so much training videos, bookd and “plans” and meetings to make MLM work. I could be missing something here but I have been with a company that sells health and wellness products via MLM for 15 years now. and all you really need to know is what Lou talked about in the first part of the video. Have something that makes value flow down to customers while the money flows up the distribution chain. So before you waste time and money Investigate if you really have a product or service that has some value to customers. Also investigate if the company compensation plan makes it possible to make money with a reasonable effort ( make no mistake there is NO free lunch with any MLM no matter what claims they make).
Our primary goal is to find customers and move product and create sales volume. Many companies have consumable products that can be ordered on autoship by distributors and customers alike that can create a stable volume every month. Now from these customers you will find the people who really want to do the business and will duplicate your efforts. The problem I see with most MLM distributors is that they sign everybody that crosses their path and the people who don’t really want to duplicate your efforts will eventually drop out and bad mouth the program because they did not make the magic money that was promised.

Bottom line.. MLM involves WORK.. lots of it.. you need to find customers who want your product and you want business builders from among these customers to create the sales volume and residual income that can be earned from MLM.

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Bill Tesch February 7, 2012 at 9:47 am Thumb up 1 Thumb down 0

Thanks Lou, sometimes the truth hurts! you need to keep your mind open to others and make smart decissions to be successfull at any thing.

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RUPAM JYOTI BORA December 26, 2011 at 2:50 am Thumb up 1 Thumb down 0

Dear Lou Abbott,

Please suggest – How can I dwnload Part II of your SO VALUABLE tutorial.

I am from India – a Country with no Regulatory Bodies for MLM – is a worst place – full of Fraudulent MLM Companies (they are all Money Circulating Ponzi Schemes) without a legit PRODUCT. Our Indian Enforcement Authorities do not have the slightest idea & tools how to deal with the problem. Hence no one seems to approach them. People are continuously losing money and still join new companies in the hope of making up the previous loss, but – loose again.

Hence your Tutorial will be remarkable Eye-Opener.

Regards
Rupam J Bora, Guwahati – Assam, India

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John July 3, 2011 at 8:22 pm Thumb up 0 Thumb down 0

Hi lou,

I am educated by the exchanges of opinions in this site. Thank you. Just to share some thoughts…

Recruiting in general, is a primary MLM strategy. Is it illegal? Stats show that hundreds of thousands of MLM members have impproved their lives in the last couple of decades. Their millions of customers were happy with the products and the results it created to themselves (In general). All uses varied recruiting styles.
MLM will die, without recruiting. Which is the legal way to recruit therefore?
MLM Companies are legal entities. If they do some illegal strategies, does it mean that such company is a scam? Many big non-MLM Corporations do illegal strats for ages.
I’m into MLM. In my downline: 55% are MLM recruiters while 45% are just product users. What is the ideal ratio to be near to being legal? to being a scam? To my mind if your downline is 100% product users only, is just a traditional store, not an MLM. Am I right in these thoughts?

Thank you.

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curtisangelobrown@hotmail.com June 30, 2011 at 8:13 pm Thumb up 0 Thumb down 0

this link for the video on pyramidor mlm is not working for me. It takes me to the Adobe Connect page 404 the selected resource does not exist.
http://csf5.6scoach.com/

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louabbott July 1, 2011 at 8:22 am Thumb up 0 Thumb down 0

Yes. My apologies, Curtis. The company that was hosting it for the last few years took it down. I plan to re-record it soon.

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Fred May 12, 2011 at 12:14 pm Thumb up 0 Thumb down 0

Illegal MLM’s,
First time person checking out this website. I read a lot of negativity on here but nothing too specific about who the “illegal” mlm companies are and who are not. Is there a straight up honest listing with ratings based on what constitutes a legit company from one that isn’t?? Or do I have to buy the information here just like everywhere else which begs the same question…Is this website a scam too, just trying to get my dollars?? Let’s be real honest here (I guess I’ll find that out if this gets published). I am a seeker of a good, solid opportunity and welcome some real advice.

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louabbott May 12, 2011 at 12:47 pm Thumb up 0 Thumb down 0

Hi Fred,

Thanks for your post.

It would be wonderful, but highly unlikely to EVER find such a list.

The reasons? There are way too many companies to evaluate. There is an enormous amount of gray area. And many (like you perhaps?) would be unwilling to pay for the research.

Have you taken the time to read or watch the free information from this site?

So I offer my book MLM The Whole Truth that teaches the “12 Critical Success Factors” as an ebook for only $19.95. And most would still rather jump head first into MLM without taking the time to read it.

But we do our best here.

Lou Abbott
Founding Editor
http://www.MLM-theWholeTruth.com
…for people who want to know the whole truth about the M.L.M industry

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Wonderer May 19, 2011 at 11:40 pm Thumb up 0 Thumb down 0

To Anti MLM Fraud & Louabbot:

Hi I’m pretty new to this MLM thing. I’ve been researching quite a bit on the difference between MLM and Pyramid Schemes. I’ve recently been asked to join a company whose selling e-membership cards into a web education program. It appears to be allowed by the government since they have a direct sales license being signed by them. Also, I don’t see any advertisements regarding the products. They’re branching out onto other products such as health products. However, so far it appears the company is making money solely from their recruitments but they say they’ll be launching the e-memberships to every school in the country soon. So will their product sales eventually level up to balance with the recruitment sales? Is this legal then? Since they’re ‘going to’ sell their products. Although most of the recruits aren’t selling them, just concentrating on the recruitments. This company has been selling the product for years but has only started the system (pyramid?) since 2003. Will it collapse under a pyramid scheme or will it last since they will be launching their products all over the country?

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louabbott May 20, 2011 at 6:55 am Thumb up 0 Thumb down 0

Wonderer,

Tell me, what does your ‘gut’ tell you?

Most illegal pyramids are full of promises of things that they are “going to do.”

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What are you even saying November 15, 2010 at 4:32 pm Thumb up 0 Thumb down 0

Anti-MLM, I can’t seem to find the link between the Amway comment and really anything you said. Personally, i don’t “do” a MLM, but my mother does and has a grand old time with it. If you can guess, its Amway.

You write “secret tools”, but wouldn’t that also mean if you recommended an information book to a friend your trading in secret tools? I’ve seen some of the things she has on books, and they are realistically just… Well… Books. Topical to the business, but still.
The tapes, I can somewhat seed where you’re coming from, but even then, they seem to just be general “this is how we did it” and “rah-rah-rah” type material. Nothing sinistar, and she’s told me many a time they are emphasized as optional.

I can see what you mean by working at a loss, but that seems to me to include counting purchases made of ‘things’ for the house as a business expense. Ive done comparisons, and given the option of buying store bought vs Amway bought, there is little difference. Yes, she buys a bottle of shampoo and doesn’t sell it, because she uses it. Whats the big deal?

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Anti-MLM Fraud November 25, 2010 at 9:04 pm Thumb up 1 Thumb down 0

I was referring to the assumption the assertion that just because a company is part of the DSA, it can’t be a scam. The reference to Amway is relevant for the same reason in the sense that even they’re a member of the DSA also, the company has been shrouded in controversy and distributors for the most part aren’t making any money in the venture as is evidenced in their income disclosure – people should be aware of these things when choosing an opportunity as I would’ve thought track record and reputation are also important?

I certainly hope Amway have changed their tune with respect to the tools business – especially given the history of this in England (feel free to educate yourself on this – the internet is littered with information) and just settled a $150million lawsuit with former distributors who accused the company of luring them into buying tools which they were (wrongly) warned were essential for their business.

Does you mother earn PV points based on products purchased for her own personal consumption and thus receives bonuses and commmisions based on such purchases – rather than sales to bona fide customers? I hope not.

Perhaps you should take it up with Amway if you feel the income disclosure isn’t representative of actual earnings or losses?

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Nelly July 22, 2010 at 11:38 am Thumb up 1 Thumb down 5

I like reading different thougths sometimes just to see where others are coming from. I wonder if there is jealousy with regard to a certain company (wine bottles company) A company whose CEO was awarded Enrepreneur of the year by Ernst and Young and reated number 1 in the food and beverage category by the Inc. 500 magazine. Will you now look for dirt of these two companies to bring weight to your argument.

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Anti-MLM Fraud November 25, 2010 at 9:10 pm Thumb up 0 Thumb down 0

Jealousy? Ernst and Young ? Inc. 500?

Stein Bagger, former CEO of IT Factory – awarded Danish Entrepreneur of the Year in 2008 by Ernst and Young. Following his award, this young “entrepreneur” subsequently declared bankruptcy, was found to have falsified his credentials, was charged with forgery and was also convicted of fraud! He was sentenced to 7 years imprisonment on June 11, 2009 after it was found that his company was operating like a ponzi scheme – he had been forging large sales orders thus creating fictional revenue.

The scam which defrauded banks and private investors to the tune of US $225 billion is considered the biggest most recent scam in Denmark’s history!
http://en.wikipedia.org/wiki/Stein_Bagger

Byrraju Ramalinga Raju was awarded Ernst & Young Entrepreneur of the Year Services Award 1999 AND Ernst & Young Entrepreneur of the Year 2007.

This scammer founded Satyam Computers but was subsequently forced to resign from the board in 2009 after admitting to corporate fraud whereby he’d cheated 6 million shareholders out of US $1.5 billion, many of which have lost their entire life savings.
http://en.wikipedia.org/wiki/Byrraju_Ramalinga_Raju

As for Inc 500 – lets take a look at the star studded line-up of 2009 (noting the company you are referring to wasn’t mentioned this year):

1. Monavie
2. GourmetGiftBaskets.com
3. SmartPrice Sales and Marketing
4. Innovative Foods
5. The Snack Factory
6. SoDel Concepts
7. LesserEvil Brand Snacks
8. Mary’s Gone Crackers
9. Plenus Group
10. Oskar Blues Brewery

People aren’t jealous or looking for dirt. People just prefer to be real.

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Anti-MLM Fraud July 12, 2010 at 7:57 pm Thumb up 2 Thumb down 1

Craig states “If you’re really that paranoid, just stay with ones that are BBB, DSA, D&B, & USChamber of Comerce members and you’ll be just fine.”

You fail to address the fact that YourTravelBiz.com and Trek Alliance – both illegal pyramid schemes were in fact DSA members.

Let’s not forget the DSA’s more infamous member, Amway – the most controversial of MLM’s where the secret tools business generated more profits from it’s own sales force than from the sales of Amway tools, the company which was fined $25million in Canada for customs evasions, convicted of price fixing AND where the losses amongst distributors continues to remain within the vicinity of 99%.

The FTC alone provides some useful information which helps consumers identify a legitimate opportunity from a pyramid scheme or a cleverly disguised pyramid scheme.
http://www.ftc.gov/bcp/edu/pubs/consumer/invest/inv08.shtm or http://www.ftc.gov/speeches/other/dvimf16.shtm

MLM attorney, Kevin Thompson has developed the GOALIE test to help consumers also.
http://www.investopedia.com/articles/04/042104.asp, http://www.themlmattorney.com/kevin-thompson-law/

The red flags include recruitment being the primary focus of activities (which is as stated by the FTC – “a time tested tip-off to a pyramid scheme”), over-priced products and a lack of retail sales by distributors to anyone outside the scheme, rewards which are far more lucrative for recruiting a huge downline than from actual sales and a compensation plan which clearly enriches only a very few at the top such as is the case with pyramid schemes.

Just because a scheme hasn’t been identified by authorities as an illegal pyramid scheme (keeping in mind authorities are reactive rather than proactive), doesn’t mean you’re not able to use your own judgement and do the “due diligence” that these companies promote (that is, seeking information from external, unbiased sources AND professional advice to ensure the investment is sound and the legality of the proposed business model).

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hamedyazd@gmail.com July 8, 2010 at 5:45 pm Thumb up 1 Thumb down 0

Dear Lou Abbott,
I used to clarify this concept by asking myself: If I join the company and don’t refer a single person, am I at a loss? If the answer was yes, then it seemed to be a pyramid scheme, and if not, then it appeared to be legitimate. I know this is a very basic and simple approach. Is my idea correct in terms of differentiating a pramid scheme and a legitimate MLM business?

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louabbott July 9, 2010 at 9:13 am Thumb up 1 Thumb down 0

Yes. That is a very good question. It’s not the whole answer, but it’s a very good place to start. If you would buy the product or service without the business opportunity attached, you probably can’t get hurt if you make no sales or no recruits. (As long as you also do not incur a lot of additional expenses to make no sales or no recruits.)

I would ask it this way to be more complete. Are there a significant percentage of people joining who just want the product or service and that are NO part of the comp plan? If that is true. The company is probably on a strong foundation for legality and good business. And, they have met at least one of my “12 Critical Success Factors” in my special report and course.

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Kendall Peterson May 21, 2010 at 12:00 pm Thumb up 1 Thumb down 0

You know Lou, along those same lines .. very rarely will you get a positive answer if you ask a distributor “Would you be a customer of this company if you had to pay full retail for their product and there was no business opportunity connected with it?”

When you DO find a company with a product ( or product line) that good, THAT is one to explore more. While I may help a client to see the strong and the weak points in a company’s business plan, it is unusual for me to say “I think you need to do this company.” ( I rarely say “run away from this company” also) Most of the time they will make a wise decision on their own after weighing the pros and the cons of a company.

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Craig April 17, 2010 at 8:22 pm Thumb up 2 Thumb down 2

I think the unfounded fears about “illegal pyramid schemes” could be put to rest quickly if one would simply look at the details of how ALL products & services are distributed. Should Rolls-Royce stockholders be put in prison for selling a $500k sedan when the exact same engine, transmission & quality can be purchased for $80k in a BMW 750iL ?? Or for $30k in a 5-yr old 750 iL??? Why is a Picasso worth $10 million when a better (newer, clearer, better-looking) origional painting can be had for $50? Why is a plane ticket to Reno sometimes worth $750 and sometimes $125? Is everybody who sells anyting a crook? The ignorant would say yes. But that’s hardly fair–or accurate. Just because you don’t know the details–or don’t understand the complexities of something it doesn’t mean there’s something wrong with it. Mabey there’s something wrong with you–like your ability to comprehend complex thoughts! If a company–ANY company– is a member of both the BBB & Chamber of Commerce; they’re generally legit. Especially if they’ve been members for a decade or more. And if they’re a member of the DSA it means they’ve repeatedly allowed the DSA to audit their books at will; and the DSA has determined that they’re honest & solid. These are MUCH better measures of a Company’s stability than the opinions on the internet written by people you have no way of checking out. Or the opinions of friends who, in the end, just plain don’t know what they’re talking about. If you need more, look up the Company in question on D&B (Dunn & Bradstreet) They rate every (real) Company from GM to GE to Sears to AVON to Amway. If you can’t find a favorable D&B rating; or if they’re not approved by the BBB, DSA, & USChamber of Commerce– skip them an try something else! And remember — you get what you pay for! Good Luck.

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louabbott April 18, 2010 at 1:29 pm Thumb up 4 Thumb down 0

Craig,

I am trying to understand your reaction to this information. Are you trying to say that it is not important to understand the difference between an illegal pyramid scheme and a completely legal mulitilevel marketing company?

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Straight Line Downline April 1, 2010 at 9:45 pm Thumb up 3 Thumb down 6

I am getting sick and tired of people overemphasizing on what is the difference between a pyramid and a legitimate MLM opportunity. There are network companies that are promoting health and wellness products and selling them to distributors at prices like $120 a month in autoship. But what about those same juice products that are sold on ebay for a fraction of the cost. I am not going to name any companies and I can pretty much bet that you know what company I am talking about. I bought a case of their health and wellness products on Ebay (four bottles of this juice in wine bottle) for only $70. Can you believe this? Who is getting ripped off here. The MLM distributor? This needs to be looked into. What is not going to stop other companies to do the same thing to rip off the hard working distributor who is trying so hard to sell the darn product to regular customers like me. But unfortunately, people like me found a cheaper way to buy the product. Now is this a scam. Please reply. I need some answers on this.

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louabbott April 2, 2010 at 8:14 pm Thumb up 2 Thumb down 2

Hi “Straight Line DL”

It is very important to understand the difference between an illegal pyramid and a legitimate MLM. Not only will all illegal pyramid schemes ultimately fail, but if you are very successful and become a top leader, you may be prosecuted with the principals of the company. Additionally, what kind of person wants to put friends, family or even strangers into an illegal business?

That said, you make a valid point about the pricing of products being an important factor. Oh, it’s easy to spot an illegal pyramid if they are selling pencils for $10 each. Not so easy with exotic juices. It easily gets into gray areas as pricing and opinions about the value of products can differ greatly.

Here’s the practical test: Is the product retailable? And, is it, in fact, being retailed?

If the only people who are buying the product are also participants in the compensation plan, the legal authorities will no doubt step in at some point and question the legality of the plan. There must exist at least a certain percentage of real end user customers who are only buying because they value the products at the price offered, not because they are participants in the comp plan.

By that standard, there are far more illegal MLMs than most of us would like to admit.

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Craig April 17, 2010 at 8:31 pm Thumb up 1 Thumb down 6

Enough of the scare tactics already. There are crooked car dealers, lawyers, teachers, priests, contractors, manufacturers, and probably even MLM companies. But you can’t stay locked up in your house all day for fear you might cross the path of a crook. M O S T people in A L L these industries are HONEST. Even those working at Law firms, Universities, & MLM companies. If you’re really that paranoid, just stay with ones that are BBB, DSA, D&B, & USChamber of Comerce members and you’ll be just fine.

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