4 Red Flags

The set of four characteristics were found to be exclusive to recruitment-driven MLMs (which included all of my sample of 600 MLM programs).

Based on careful analysis of available data,MLM programs with all of these characteristics have a shocking loss rate – approximately 99.7%[i] of ALL participants lose money (after subtracting ALL expenses)!

In the light of these odds, typical promises made by MLM promoters of lucrative incomes are misleading, except for a few at the top of the pyramid who got in early.

Again, it is important to recognize that –

  • These four characteristics are causal because they identify the cause of the harm or consumer losses.
  • They are defining because they clearly separate MLMs, or product-based pyramid schemes, from all other forms of commercial activity.
  • And they are legally significant because they answer the question that law enforcement has had a difficult time answering; i.e., how the primary emphasis on income from recruitment (as opposed to selling direct to consumers) can be determined from the compensation plan – rather than from complaints, which are simply unreliable in this arena, since victims of endless chains rarely file complaints with law enforcement.

It is the synergistic effects of these four CDCs working together in an MLM that cause the extraordinary loss rates characteristic of these schemes. Interestingly, most of the laws that might implicate MLMs as pyramid schemes are based on one or more behavioral effects of the scheme (such as whether or not sales are made to non-participants) or behavior of  participants, and not the essential causes of the problems; i.e., the underlying structure, or compensation plan. As explained already, rewards drive behavior.

No wonder law enforcement has been so confused and inconsistent in this arena. Even so, using this analysis, law enforcement agencies can work within existing laws. Attempting to change the laws is risky, since the MLM lobby (Direct Selling Association) could then influence legislators to pass deceptive “anti-pyramid” laws that are actually favorable to MLM, as they have already done in several states.

Twenty years of research and feedback confirm this analysis, including a one-year experiential test, direct observations of numerous MLM opportunity meetings; communications with thousands of participants (and ex-participants and family members), executives from a variety of MLMs, and with consumers as MLM prospects; consultations with top MLM experts and attorneys; the collection and processing of available data (including official company reports); analysis of over 600 MLMs with all types of compensation plans; and surveys of consumers and tax professionals.


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