This covers US-based MLM companies. I mean, the intensifying regulation of FTC on MLM covers MLM that are either US-based or foreign companies that are operating in the United States.
If you are in MLM business and your partner company have its headquarters in the U.S., or your company is aiming for global expansion and wanting to branch out in the U.S., you need to pay attention.
There is an intensifying regulation of FTC on MLM.
If your company is already compliant with the standards set by the Federal Trade Commission (FTC), then there’s nothing to worry about. But, if you think one of the portions of your company is not complying, let’s say the compensation plan, then you either initiate change, or change companies.
That is a harsh statement, but it is better to do your homework than to be sorry.
FTC On MLM – The Rules
First of all, don’t be mad at FTC. They are just there to protect consumers.
In 1979, Amway was accused of having a pyramid scheme, and they were investigated by the FTC. At the end of the investigation, the courts have declared that Amway is a legitimate Multi Level Marketing company, and is not a scam.
From that investigation, a standard was set as to what is legit MLM and what is not.
Basically, an MLM business is legitimate if:
- There is a balance between making money off overriding commissions from the sales done by your recruited distributors, and selling products on retail to outside customers (non-members).
- If distributors are honest with the information they’re sharing about the company, products, compensation plan and the income claims.
Through the link below, you will find the guidelines set by the FTC on how to evaluate MLM business opportunities.
In the guidelines set by the FTC, you will notice the emphasis on “distributors should be making money off from selling products to the public and not just from recruiting”.
That statement alone is enough to make a lot of companies worry about their present compensation plans for distributors. If that will be strictly implemented, what will happen to companies with binary or matrix compensation plans?
Perhaps, they can adapt by adding a feature in their comp plans incentivizing distributors more on retail sales to non-members.
There is NO PROBLEM if…
If the company is following what has been set by the FTC, there’s nothing to worry about.
Some companies who have been in this industry for decades, and even almost a century now, have developed programs that are compliant with the FTC.
Let’s say for example, Avon.
Have you ever met an Avon Lady?
The first time I encountered an Avon Lady, she tried to sell me products with her brochure of cosmetics and apparels. There was no talk about me joining Avon.
Knowing Avon is a Multi Level Marketing (MLM) company, the 2nd time we met, I inquired about the opportunity of joining her team. It was only in that moment that the topic of recruiting or joining the company was discussed.
Avon is a good example of a legitimate MLM business.
Another good example is Amway.
We know there are other companies out there that are in compliance with the rules, but we will not mention them all here. The point is, if a company and its distributors are all following the rules, no problem will arise with the FTC.
What About Vemma and Herbalife?
These two companies were among the companies recently investigated by the FTC, along with some online companies who have been shut down.
Vemma and Herbalife, although there’s a similarity in what they do, their compensation plans for their distributors are not the same. Herbalife spots an older type of compensation plan—a stair step break away plan—while Vemma used a binary type of compensation plan.
Unlike the stair-step break away plan, a binary plan is “recruitment heavy”.
It means, much of the money is coming from recruiting new distributors and encouraging them to place orders with their own money, either for personal consumption or for reselling to outside customers.
Worse, young energetic people have joined Vemma, all chanting the “get-rich-quick” chant… so they were investigated.
When people get frustrated with their dreams because they’ve been lied to, they will file a complain. That’s what happened to Vemma, and they were shut down by the FTC.
On the other hand, Herbalife experienced a quite different challenge.
An envious investor in one of America’s stock exchanges accused Herbalife is sporting a pyramid scheme. That launched an investigation of the company. Luckily, it was found out that Herbalife is legit, it only needs some changes in its comp plan to make it more compliant with the FTC.
And so Herbalife heeded the FTC, together with some huge fine.
We have witnessed the closure of several companies.
You wouldn’t know how nasty it is, until you yourself experience all your efforts coming down the drain. You have spent long hours, days, months, or even years building your business and all of a sudden, the partner MLM company is shutting down.
To others, the lure of making big money promoting a relatively new company is strong, they are no longer attracted in joining unattractive but solid companies like Amway or Avon. Well, that’s fine and good luck to you.
But don’t say you haven’t been warned.
To companies local in your country, maybe your law enforcers are laxed by now. But come to think that majority of law enforcement activities around the world are patterned to the United States, so maybe soon… your authorities will catch up on you guys if you are not compliant with the rules.
Think about it.
MLM is a good business, it is more generous than affiliate marketing as you can get paid not only from your referrals but also from the referrals done by your referrals, but there’s a law or rules governing this business.
Abide by the rules.