On July 19th, AdvoCare is changing from an MLM compensation model to a single-level compensation plan. In other words, AdvoCare will only pay distributors commissions for their wholesale and retail sales. The company terminated all compensation of overrides, leadership bonuses, and downline compensation. Over one […]
In January of 2018, the FTC released business practice guidance to multi-level marketing companies. As part of this guidance, the FTC described illegal mlm compensation structures. “Pyramid scheme” is another term for this type of illegal MLM. The “unlawful MLM structure” description comes from court […]
In January of 2018, the Federal Trade Commission of the United States released guidance on how multi-level marketing companies and participants should talk about business opportunities. The FTC is one of the government agencies which regulates all kinds of businesses, including multi-level marketing companies.
Why should we care?
The FTC works to make sure that things are fair, there is no fraud, and to protect consumers. These guidelines lets us know what the FTC has decided to be bad and why. Companies that violate these guidelines are bad for consumers, business, and in some cases could end up in trouble with the government.
If you are recruiting participants, these guidelines are a great way to think about the best way to share an opportunity. New recruits will be well informed and on their path to success with no regrets. These guidelines from the FTC are not the law but they are help to understand the law and to follow it.
FTC Guidelines on Sharing Business Opportunities
The FTC explains that, to follow the law, you must tell the truth and not be misleading to recruits and participants about the opportunities. A company violates the law if they say or show things that are false or misleading about the business (including about how much you can earn). This includes making claims when there isn’t really proof or evidence for them.
“An MLM’s representations and messaging concerning the business opportunity it offers must be truthful and non-misleading to avoid being deceptive under Section 5 of the FTC Act. An MLM’s representations about its business opportunity, including earnings claims, violate Section 5 of the FTC Act if they are false, misleading, or unsubstantiated and material to consumers.” (FTC Business Guidance Concerning Multi-Level Marketing)
This all seems great. When evaluating an opportunity, you want to make sure that the things you learn about it are true and accurate. Claims that are false or fake shouldn’t be allowed. The FTC makes deceptive practices illegal.
Must be a “reasonable basis” for claims
The first guiding principle (here under #13) says that companies must have objective evidence that supports the claims they share. If you are evaluating a business opportunity you can (and should!) ask for the evidence.
Claims to get rich are deceptive
“Some business opportunities may present themselves as a way for participants to get rich or lead a wealthy lifestyle. They may make such representatives through words or through images such as expensive houses, luxury automobiles, and exotic vacations. If participants generally do not achieve such results these representations would likely be misleading to current or prospective participants.” (FTC Business Guidance Concerning Multi-Level Marketing)
The FTC gives other example claims that are misleading unless they are “generally” achieved. These are just examples and similar claims could also be misleading.
- Making income that is similar to a career or job
- Earning thousands of dollars each month
- Become a stay-at-home parent
- “Fire their boss”
The FTC says that if participants don’t generally get these things then claiming participants could is misleading.
Many companies and leaders will share their own success. The guidance says this is okay only if they include information about how much is earned or lost by most participants.
When talking about business opportunities, talk about real results of most participants. Our research has shown that vacations, big paychecks, quitting a job, and free cars are usually very rare. Check out our income disclosure analysis pages for some examples. Ask for these disclosures. The disclosures we’ve looked at do not include expenses or losses which makes it hard to tell how many people lose money and how much they lost.
Examples should tell the whole story
People sometimes explain an opportunity with a hypothetical: “if you recruit this number of people” then you will get a big commission check. These examples need to include any assumptions for the “typical participant.” That means, for example, if any people you recruit also need to sell a certain amount of product that requirement should also be shared.
If assumptions and additional requirements that make the earnings example true for most people are not included then it’s misleading. This is the 5th principle listed under #13 in the Business Guidance Concerning Multi-Level Marketing.
This, again, is pretty common sense. It is important to get the whole story when hearing about a business opportunity. It would be bad to invest and do a lot of work and then learn there were extra requirements. That would be misleading and unfair.
The company should tell participants not to make false claims
Most MLMs will pay people to recruit new distributors and that gives them a good reason to make false claims. MLM companies should have rules and check up on participants to avoid false claims.
“[An] MLM should (i) direct its participants not to make false, misleading, or unsubstantiated representations and (ii) monitor its participants so they don’t make false, misleading, or unsubstantiated representations.”
Usually, a good place to look for these rules is in the contracts that new recruits sign. Sometimes they will be in “Rules and Regulations” or “Guidelines and Procedures.” You can ask for these documents. Participants often violate on social media, during opportunity meetings, or in one-on-one conversations. Some companies are very strict but others allow a lot.
Pyramid Scheme Allegations CBS News story with detailed information around the $1 billion lawsuit filed in October alleging LuLaRoe is a pyramid scheme. Also references LuLaRoe’s own legal action against critics. https://www.cbsnews.com/news/lularoe-is-accused-of-being-pyramid-scheme/ Fortune.com article explaining LuLaRoe and referencing the lawsuit filed in October alleging LuLaRoe […]
Probably, it’s hard to tell. LuLaRoe claims to be a ‘Multi Level Marketing’ company. MLMs share many qualities with Pyramid Schemes but are a bit different. Because they share so many qualities it can be incredibly difficult to tell if the company is a legitimate marketing company or a pyramid scheme.
How to spot a Pyramid Scheme:
The US Government’s Federal Trade Commission has more information about pyramid schemes to help.
- Large profits are based primarily on recruiting others not on the real sale of goods.
- Recruits are forced to buy more products than they could sell often at inflated prices.
- People at the bottom (new recruits) make excessive payments for inventory that accumulates in their basements.
- Many schemes will claim product sells like crazy — but actually sales only occur between people inside the structure or to new recruits. Check to see if price is inflated.
How does LuLaRoe stack up?
- If you look carefully at the compensation plan for LuLaRoe much of the big profits come both directly and indirectly, from recruiting others to sell LuLaRoe.
- In order to join those recruits have to buy thousands upon thousands of dollars of merchandise. See: LuLaRoe: Cost to Get Started
- Members of LuLaRoe encourage distributors to pass around inventory between themselves. Inventory is traded among distributors because inventory purchased from LuLaRo is random (you cannot choose the patterns, sizes, etc). Distributors are also encouraged to purchase more in order to get more chances to get the more rare (“unicorn”) items.
- The leggings, dresses, and more aren’t valued at what the company says they are (check out ebay.com for LuLaRoe for current market pricing by checking sold listings).
LuLaRoe probably is a Pyramid Scheme
Pyramid schemes will disguise themselves as MLM or direct sales companies, and it appears that LuLaRoe is doing that because of the red flags above. Whether it’s a pyramid scheme, a scam, or just an unhealthy business, LuLaRoe shares many bad qualities with Pyramid Schemes. These qualities make it a dangerous opportunity and everyone should probably avoid LuLaRoe.