FTC: Line between MLM and Pyramid Fraud too Complex to Regulate
Sep 30, 2011
The staff of the Federal Trade Commission (FTC) has reversed its earlier position on the need to regulate multi-level marketing and has now recommended exempting all MLMs from a proposed “business opportunity rule.” This means MLMs will have no rules requiring disclosure of income averages, recruiting requirements, saturation, failure rates, or business costs when recruiters lure people to invest in MLM’s famous “unlimited income opportunity.”
The reason? According to the FTC staff, the line between MLM fraud and legitimate direct selling is too complicated! The FTC staff report states, “… identifying a pyramid scheme (or, at least, one that attempts to disguise itself as a legitimate business opportunity) entails a complex economic analysis including an in-depth examination of the compensation structure and the actual manner in which compensation flows within an organization… There is no bright line disclosure that would help consumers identify a fraudulent pyramid from a legitimate MLM.”
But this thin – almost indistinguishable – line between fraud and the operations of MLMs, which the FTC says exists, prompted the staff to a logic-defying conclusion. Instead of seeing this “complexity” (translation: tricks, disguises, diversions and lack of disclosure) as a compelling reason for the FTC to provide better consumer protection and more oversight of MLMs, the FTC staff cited it as the cause for doing nothing! It recommended exempting MLMs from disclosure rules that would obviously help at least some consumers better evaluate MLM “business opportunity” solicitations.
In fact, the original plan to require disclosures by MLMs was never intended to flush out the illegal pyramids from the ranks of “business opportunity” promoters. Rather, it was to stop the misleading, exaggerated and false income claims by the promoters. Fraudulent, misleading and false income claims by MLM companies are everywhere on the Internet. Millions of consumers are misled to believe that MLM schemes offer a real alternative to jobs, professions or investments. The statistically verified reality of 99% loss rates is covered over by the false hype. If MLMs were required to disclose actual consumer failure rates, dropout rates, business costs, and the actual sources of income for the top recruiters, among other important facts, far fewer people would be misled.
By using the “too complicated” argument regarding identifying pyramids, the FTC has now abandoned any action toward ending the false and misleading income claims by the MLMs, a particularly virulent type of “false advertising.” The FTC now argues that the needs of the MLM companies supersedes the needs of the public. The MLM industry argued that MLMs would be harmed, some to the point of collapse, if they had to make fuller disclosures to consumers.
See the new resources available from Pyramid Scheme Alert, “What About This One“, that offer consumer/investors a practical guide for identifying and avoiding MLM scams.
See the full report on how the MLM industry has influenced – and controlled – the FTC, The Main Street Bubble.