View Full Version : Case Law, MLM, Recruiting Scams.

12-25-2013, 12:28 PM
Some good references on the legal side of MLM. Also an interesting section for job seekers who may be subjected to the cattle call sort of interview process that seems to occur frequently in financial services type opportunities.

All You Need To Know About MLM (Is MLM a Scam?) (http://www.financialindustryscam.com/mlm.htm)


09-08-2014, 01:27 PM
One of the primary reasons people get into MLM is to attempt to make money. Some may love the product, just as some business people love the work they do. In most cases however the product seems a distant second to the "opportunity" in MLM. The products appear so overpriced in MLM that often there is little to no true retail market. Affiliates are largely left with only one real way of making money in MLM, endless recruiting of people like themselves who commit to "self consumption" of the product du jour.

In study after study, program after program, despite all the hoopla, less than 1% of MLM participants make any significant money. This success rate has been consistent for years, I would submit it is the model itself that is flawed, not the lack of effort of the participants. Sure there are some people who just don't want to work, that is true of every business. What I believe relevant are the "success" totals compared with other methods of starting/operating a business.

"Failure and loss rates for MLMs are not comparable with legitimate small businesses, which have been found to be profitable for 39% over the lifetime of the business; whereas less than 1% of MLM participants profit." http://www.ftc.gov/sites/default/files/documents/public_comments/trade-regulation-rule-disclosure-requirements-and-prohibitions-concerning-business-opportunities-ftc.r511993-00008%C2%A0/00008-57281.pdf

"Some studies show that franchises have a success rate of approximately 90 percent as compared to only about 15 percent for businesses that are started from the ground up."

What Is the Real Survival Rate of Franchised Businesses? | Entrepreneur.com (http://www.entrepreneur.com/article/227394)

Another data point when considering a franchise is the percentage of loans that fail to be repaid.



13 Mistakes New Franchisees Make -- And How To Avoid Them - Forbes (http://www.forbes.com/sites/karstenstrauss/2014/05/27/13-mistakes-new-franchisees-make-and-how-to-avoid-them/)

Why Franchisees Fail - WSJ (http://online.wsj.com/news/articles/SB117770922300685303?mg=reno64-wsj)

INCOME DISCLOSURES FOR SOME MLM: Multi-Level Marketing Income Disclosures | Fraud Files Forensic Accounting Blog (http://www.sequenceinc.com/fraudfiles/2012/12/multi-level-marketing-income-disclosures/)

While I will concede it costs more to start most franchise businesses than most MLM programs, the success rate is much higher. I also have seen many MLM recruiters who are not up front with either the time or money it takes to become a profitable distributor.


Starting a business for most people is better IMO with what they already know or enjoy. A well selected franchise with a demonstrated track record of success might even help that along. Even with all those things, it will likely take skill, hard work, luck, and a few years.

Despite all the rhetoric about not having to sell from many MLM recruiters, I consider MLM to be a sales job in the purist sense of the word. If you like to sell there seem to be infinite ways to make more money with less hassle than MLM. If you don't like to sell, I can't see how recruiting people is going to be a hell of a lot of fun. Either way MLM is not producing a level of income or lifestyle for 99% of the people involved.

09-08-2014, 01:42 PM
Even some of the "legit" MLM companies seem to run counter to the law. From a legal standpoint it is probably best not to get involved in Pyramid Schemes, but I am not Officer Barbrady. Just know that if you break the law you could have a bad time. The bigger concern I have is most people who get involved in these schemes lose money. What could be worse than busting your ass for a few years, running up a bunch of debt in your "business", and finding out you are not making any cash? Legal or no, that is the outcome for 99% whatever the reason.

Here are some tips that consumers and business might find helpful.

1. Beware of any plan that makes exaggerated earnings claims, especially when there seems to be no real underlying product sales or investment profits. The plan could be a Ponzi scheme where money from later recruits pays off earlier ones. Eventually this program will collapse, causing substantial injury to most participants.

2. Beware of any plan that offers commissions for recruiting new distributors, particularly when there is no product involved or when there is a separate, up-front membership fee. At the same time, do not assume that the presence of a purported product or service removes all danger. The Commission has seen pyramids operating behind the apparent offer of investment opportunities, charity benefits, off-shore credit cards, jewelry, women's underwear, cosmetics, cleaning supplies, and even electricity.

3. If a plan purports to sell a product or service, check to see whether its price is inflated, whether new members must buy costly inventory, or whether members make most "sales" to other members rather than the general public. If any of these conditions exist, the purported "sale" of the product or service may just mask a pyramid scheme that promotes an endless chain of recruiting and inventory loading.

4. Beware of any program that claims to have a secret plan, overseas connection or special relationship that is difficult to verify. Charles Ponzi claimed that he had a secret method of trading and redeeming millions of postal reply coupons. The real secret was that he stopped redeeming them. Likewise, CDI allegedly represented that it had the backing of a special overseas bank when no such relationship existed.

5. Beware of any plan that delays meeting its commitments while asking members to "keep the faith." Many pyramid schemes advertise that they are in the "pre-launch" stage, yet they never can and never do launch. By definition pyramid schemes can never fulfill their obligations to a majority of their participants. To survive, pyramids need to keep and attract as many members as possible. Thus, promoters try to appeal to a sense of community or solidarity, while chastising outsiders or skeptics. Often the government is the target of the pyramid's collective wrath, particularly when the scheme is about to be dismantled. Commission attorneys now know to expect picketers and a packed courtroom when they file suit to halt a pyramid scheme. Half of the pyramid's recruits may see themselves as victims of a scam that we took too long to stop; the other half may view themselves as victims of government meddling that ruined their chance to make millions. Government officials in Albania have also experienced this reaction in the recent past.

6. Finally, beware of programs that attempt to capitalize on the public's interest in hi-tech or newly deregulated markets. Every investor fantasizes about becoming wealthy overnight, but in fact, most hi-tech ventures are risky and yield substantial profits only after years of hard work. Similarly, deregulated markets can offer substantial benefits to investors and consumers, but deregulation seldom means that "everything goes," that no rules apply, and that pyramid or Ponzi schemes are suddenly legitimate.

Pyramid Schemes | Federal Trade Commission (http://www.ftc.gov/public-statements/1998/05/pyramid-schemes)

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Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.

Multilevel Marketing | BCP Business Center (http://www.business.ftc.gov/documents/inv08-bottom-line-about-multi-level-marketing-plans)

09-08-2014, 02:27 PM
I find myself going back to time and again in discussions with people about MLM and tax deductions. I linked it recently in another thread, but feel it is SO important as a stand alone concept that it will prove useful to anyone exploring MLM.

Retail Industry ATG - Chapter 3: Examination Techniques for Specific Industries (Direct Sellers) (http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Retail-Industry-ATG-Chapter-3-Examination-Techniques-for-Specific-Industries-Direct-Sellers#cost)

I largely attribute the MLM TAX MYTH to Rich Dad/Made Up Bullshit Dad Robert Kiyosaki.

My strongest pleading if you feel the urge to do business with someone who is quoting Rich Dad read this analysis John T. Reed's analysis of Robert T. Kiyosaki's book Rich Dad, Poor Dad (http://www.johntreed.com/Kiyosaki.html)

If you still feel the need after reading it, I suggest seeing if these vans come through your neighborhood.



Here we go.

You will often hear from people pushing you into MLM that having your own MLM business is some sort of magical tax shelter. What almost always comes out of their mouth next is what is called tax fraud. This passage is directly from the IRS, if you are hearing anything contrary (LIKE DEDUCTING PURCHASES OR VACATIONS FROM YOUR TAXES) my thought would be to skip the other direction.

However, the cost of a product that is used by the direct seller is a personal expense, even if that product is occasionally shown to prospective customers. Some direct sellers erroneously think they can decorate their home with products and deduct the cost as a business expense. To be deductible under IRC Section 162, the expense must be an ordinary and necessary expense paid or incurred in carrying on a trade or business (also see Regulation 1.162-3). Under IRC Section 262, no deduction generally is allowed for personal, living, or family expenses.

Example 1: York is a direct seller who uses many of the products in her own home. When potential customers come to her house, she can show them drapes she bought from the company, as well as her lawn chairs, toaster, grill, tea set and spice cabinet. By showing these items in her own home, she hopes to interest people in buying them from her company or in becoming a direct seller themselves. York cannot take a deduction for the cost of any of these products. Because she uses them in her own home for personal reasons, their cost is not a cost of doing business.

I agree there are tax advantages to having your own business if you are making money. I would include certain retirement plan set ups that allow the owner to defer large amounts of income. Certain timing or structure of income options that allow the owner to defer or pay taxes at a lower rate. And certain estate planning options if the owner is looking to transfer his/her business. While this is not the time nor the place, and I am certainly no tax guru, these are real benefits.

If a MLM recruiter is discussing ordinary business expenses business travel, hotel, home office, as if some never before known tax saving panacea I would think twice about their advice and knowledge. If they are telling you to deduct things like clothing or your monthly super shakes get the heck out of there before Elliot Ness comes a knocking.

09-12-2014, 09:15 AM
This article popped up yesterday on franchise defaults.

If you look at the highest defaulter, 59% manage to service their loans. Even a glass is half empty guy like me can see that. Comparing this with a 99% failure rate in MLM is not exactly apples to apples. However, generally speaking I like to think that people who are making money don't default on their loans or quit MLM.

One of the franchises on this list had a bunch of units listed for sale a while back. My first thought was that must be a really sucky business to run. Although in fairness it could have been one owner selling multiple locations which might offer a different take. When I compare this with MLM "distributorships" which are always for sale, only a "self consumption" model will provide rewards for most. If you are trying to actually retail products I see no business reason to have an unlimited number of representatives in your area.


Some Franchise Brands Have Higher-Than-Average Default Rates - WSJ (http://online.wsj.com/articles/some-franchise-brands-have-higher-than-average-default-rates-1410392545)

09-12-2014, 11:19 AM
Also, some businesses are purchased as 'loss leaders' for tax purposes. They don't 'lose' because their offerings are overpriced or competition is right next door. This shows that mlm people don't have a clue about running real business when they trot out their 'X' amount of real businesses fail every year.

02-05-2017, 11:22 AM
I would argue that "endless chain recruiting" is a huge red flag in and of itself in any opportunity. In too many ventures recruiting is the only true product, which leads right down the path of Ponzi/Pyramid scam. No matter the backstory of "external revenue" unless it can be demonstrably proven then the participant is opening themselves up to being scammed. By proven I mean audited financials and SEC filings, not payment proofs on You-Tube.

The 70% rule is a good metric for would be entrepreneurs in asking themselves if they personally are selling 70% of the product to people not in the opportunity. If the answer is no, then there very likely is a problem.

The 70 Percent Rule in a Nutshell.

In a nutshell, the 70 percent rule is to be found in the distributor agreements or policies and procedures of most leading network marketing companies. Its intended purpose is to prevent purchases of inventory in unreasonable or excessive quantities by distributors. As it is typically stated, the rule requires that distributors procure orders for inventory only when they have disgorged themselves of at least 70 percent of previously purchased inventory. The bottom line is that the distributor should not reorder unless product which has been previously purchased has been passed on to the ultimate users.

The Seventy Percent Rule by Jeff Babener MLM Attorney (http://www.mlmlegal.com/seventy.html)

02-20-2018, 05:02 PM
Worth a look.


04-18-2018, 10:56 AM

The Slave Circle Documentary Exposes Direct Sales Scams

05-02-2019, 10:30 PM
Something about not selling product and instead recruiting others who in turn will recruit more others I'll bet.


BBC blows lid off Younique & Nu Skin UK recruitment schemes

11-20-2020, 11:22 AM
This is a good interview with Robert Fitzpatrick on MLM.


04-19-2021, 09:57 AM
Not everyone can be a BossBabe!

Here’s the hard truth: the percentage of women who truly succeed in an MLM business is low — extremely low. As in 1%. ONE. PERCENT. That’s right, folks. Remember those horror stories about women who’d been duped into buying hoards of LulaRoe leggings and then couldn’t sell them and were out the money they’d invested? Their story isn’t unique! That’s the MLM model — trick people into joining “the team,” get them to invest their time and their money, and then let them sink (or be the 1% who swim.)

This percentage isn’t a made-up fairytale number for dramatics. A study conducted by the FTC (Federal Trade Commission) revealed that 99% of MLMs fail and end in a loss of revenue, not a gain.

MLMs Aren’t Just Bad For Your Finances — They’re Bad For Your Friendships (https://www.yahoo.com/now/mlms-aren-t-just-bad-090039815.html)

The Reddit post says that after responding several times that she “was not interested” in all the parties her “friend” kept inviting her to without her permission, the MLM-er “replied with a bunch of hunbot ‘I’m too busy building my empire for your negativity # byefelicia.'”

Your empire?! Umm sure.