The Federal Trade Commission (FTC) recently sued a multi-level marketing (MLM) company along with its executive officers for allegedly operating an illegal pyramid scheme. The United States Federal Court for Arizona has issued a temporary restraining order shutting down the company while proceedings take place.
Illegal Pyramid Scheme
The lawsuit filed by the FTC accused MLM “Success by Health” of operating an illegal pyramid scheme through the distribution of their instant coffee product “MyocoCafe.” The flagship product contains a mushroom that the company claims has considerable health benefits despite the inability to show any evidence.
The FTC alleged that “Success by Health” allowed its distributors (sales reps) to make money by recruiting additional distributors rather than through sales of the actual product. Legitimate MLM companies, such as Mary Kay, Amway, and Juice Plus+, allow their distributors to earn money by actually selling the product.
“Participants in legitimate multi-level marketing companies earn money based on actual sales to real customers rather than recruitment,” FTC’s Director of Consumer Protection Andrew Smith said. “But pyramid schemes depend on [the] recruitment of new participants to pay out to existing participants, meaning that the vast majority of participants will ultimately lose money.”
Warning Signs of a Pyramid Scheme
It is often difficult to spot the difference between a pyramid scheme and a legitimate MLM, especially since they are structured in much the same way. The FTC website lists a number of warnings signs that can help you recognize a pyramid scheme:
- Promoters claim you can make lucrative amounts of money immediately. “Success by Health” told its recruits they could earn up to $1 million per month.
- Promoters highlight recruiting others to make a profit rather than actually selling the product.
- Promoters manipulate you into acting “now” in order to “take advantage of a great opportunity.” They dodge any legitimate questions and discourage you from researching the company.
How to Avoid Pyramid Schemes
The easiest way to avoid a pyramid scheme is to steer clear of MLM. However, if you enjoy the sales industry and know you can make money by selling a product and recruiting others to do the same, then consider the following tips to ensure you join the right company:
- Research the company thoroughly
- Investigate the current distributors and their tactics
- Calculate the costs and risks involved (including any refund policies)
- Research the quality and price of the products
- Have a professional look over the paperwork
If you’re involved in an MLM, exercise caution. Protect yourself and your finances first by being wary of manipulative business practices.