Some day, you might have a call from your friends or family members who introduce themselves as budding entrepreneurs. They sell so many products like essential oils, nutritional products, etc. of a company and want you to join them.
This is called MLM or network marketing. People join as distributors and make money by selling the products of the company they work for. MLM is not like some businesses, there is no salary or wage or boss-like things, they are all commission-based. The company pays commissions to distributors according to some compensation plans.
Pyramid scheme Vs MLM
Multi-level Marketing is there for decades, some documentaries and podcasts brought the concept into the public eye. The pyramid structure with the MLM concept started to ruin the system and violated the anti frauds and scams guidelines.
Still, the pyramid schemes started to spread blazing fast around the globe and attracted countless people into it as an earning scheme. Surprisingly one day few pyramid scheme makers quit the money-making game and vanished, and the people were left in great trouble, some were in bank debts. The situation was really bad and it badly affected the legitimate MLM business. The FDC (Federal Trade Commission) declared some MLM businesses as illegal.
Modern Network Marketing
Despite the unpleasant history with the pyramid scheme, Network Marketings are still on the board. According to the Direct selling association, these companies have made over $35 billion in retail sales just in 2019. DSA claims that around 6.8 million distributors have earned an annual average of $ 5,176.
The FTC’s Koscot decision is a widely accepted model for starting a legal MLM business. In a case in 1975, the court ordered that MLM companies must pay suppliers for real retail sales to their customers, regardless of how many recruits and sales.
After few years one FTC case against Amway jumbled things a bit. The distributors usually gain commission on both retail and sales to their downline recruits, who turned around and started selling the products to people outside the Amway organization. This started conflicts with the FTC’s rules at that time, but there were some loopholes in that like if the recruits choose to quit the distributors were assigned to buy back the unused products. As a result, the agency gave Amway a go-ahead in 1979.
This later becomes a model for all other network marketing companies (not pyramid schemes). Most of the network marketing companies adopted some version Most of the MLM companies adopted some version of Amway rules, that still exist today to suit the FTC definition of a legitimate MLM.
Business Opportunity Rule
The FTC’s business opportunity rules stipulate that the company recruits, work-from-home, and other independent distributors provide detailed information about purchase risks. When it was first proposed in 2006, the rule was applicable to MLM also this dramatically increased its lobbying dollars to congressional representatives. Many of them written letters regarding exempting MLMs from this rule.
The letter worked and when the Business opportunity act became a law in 2012, the rule was amended to exclude most of the MLM companies. For the past several years, MLMs have been in a good position to continue to influence the courts in their favor.