This blog post is the companion post to the video: How to Tell if a Company is a Pyramid or a Legitimate MLM.

You may have been recruited for a network marketing opportunity or you are a recruiter. Inevitably, this question will come up, is the company a pyramid scheme or a legitimate business opportunity?

Although this is a complex legal area, let me share a simple metaphor that draws a clear line in the sand.

The metaphor is about a gentlemen, will call him Party #1, and he sells a case of canned tuna fish to Party #2 for $10. And, Party #2 sells it to Party #3 for $20, and Party #3 sells the case of canned tuna fish until it gets to Party #10, who buys the case of canned tuna for $500. And, Party #10 opens up the case of tuna fish and it’s rancid. It’s inedible.

He goes back to Party #9 and complains, “I bought this case of tuna for $500 and it’s rancid.” Party #9 tells him to take it to Party #8, and Party #8 tells him to take it to Party #7, and so on until Party #10 goes all the way back to Party #1 and says, “You’re the one who started all of this! I have a problem!”

And, Party #1 asks, “What’s your problem?”

Party #10 says, “Well, I bought this tuna fish, I opened it up, it’s rancid.
It’s no good!”

Party #1 asks, “Well, what’s your problem?”

Party #10 says, “Don’t you understand? It’s rancid. How am I going to sell

And, Party #1 says, “Well, you don’t have a problem.”

Party #10 answers, “What do you mean I don’t have a problem?”

And, Party #1 says, “You don’t understand, this tuna is for selling, not for

If you think about that metaphor, it may help explain the difference between a legitimate company and a pyramid scheme.

And, there lies the difference. Distributors in a network marketing program that are merely buying product to buy into the “deal” as opposed to having the intention of really making a market for the product, are really working a pyramid scheme, not a legitimate direct selling business. Remember, when you offer the opportunity to your next door neighbor or your best friend, it’s your credibility that’s going to be on the line for years to come.

So, what do you look for with respect to legitimacy versus pyramid schemes? Here are nine pyramid scheme checklist items that you should consider:

1) Product and Price – Does the company offer a high quality product for which there is a strong demand in the real world marketplace? Is the product fairly priced and priced competitively with similar products? Can the product be demonstrated and does it stand out when you show it to friends? Is the product propitiatory to the company and available only through its distributors? Ever notice how you can’t buy Avon products in stores or Shaklee vitamins at pharmacies? Is it backed up with a customer satisfaction guarantee? Is post-sale service or customer assistance available? Do the people who participate in the program buy the product enthusiastically based on its own merits even if they don’t participate in the compensation program?

2) No investment Requirement – Can you participate in the company’s program without having to make any investment other than purchasing a sales kit or demonstration material sold at company cost?

3) Purchase and Inventory Requirements – Can you become a distributor or sales representative without having to fulfill a minimum purchase requirement or inventory requirement? When you are pitched to purchase thousands of dollars in inventory then you should run fast in the opposite direction. Does the company’s compensation plan discourage inventory loading? Garages and backrooms filled with products of no useful purpose to anyone.

4) Sales Commission Sources – Are sales commissions paid only on actual products/services sold through distributors in the network to the end user or ultimate consumer? This means that products don’t end up in basements and closets. They are used because they have a genuine value. Does the compensation plan avoid paying commissions or bonuses for the mere act of sponsoring or recruiting? If it pays headhunting fees, it is illegal.

5) Buyback Policy – Will the company buy back inventory and sales kit materials from distributors who cancel their participation in the program as long as these items are in resalable condition? This policy is required in states which have adopted multi-level distribution statutes.

6) Retail Sales – Is there an emphasis on actual retail sales to end consumers, that is, to people who are not participating in the distribution program? Can the company demonstrate efforts to market products to the ultimate consumer? Do the company’s distributors have ongoing retailing requirements to qualify for commissions?

7) Expect an active and not a passive role for distributors – Are distributors in the company required to actively participate in the development and management of their networks?

8 ) Earnings Misrepresentations – Do the company’s literature and training materials scrupulously avoid claims of income potential? The Federal Trade Commission, attorneys general and postal inspectors all have their eyes on the matter of earnings representations. The acceptable approach emerging is that there should be no earnings representations unless they are based on a verifiable track record of the average earnings of distributors. For instance, a company should have statistics to show the percentage of active distributors and the average earnings of active distributors.

9 ) Good Training – Does the company offer its independent distributors solid training opportunities in sales and recruitment? Are different levels of training offered to match the increasing levels of experience and responsibilities of distributors?

Is this the end of your journey? Obviously not. You’ve looked at some legal issues, and now it’s time to move on to some solid business analysis, but it’s a great start.

For more information visit our websites: and

Or, visit this link for more information:

MLM Pyramid SchemesEverything You Need to Know All in One Place

Make sure to visit our blogs for the latest information on the direct selling industry: MLMLegal Blog Home and MLM Attorney Blog Home. HINT: Chose a category to narrow your search for discussion topics!

Find us on our social networks:

Google Plus:





And, as always, visit, the best MLM resource on the web. The next Starting and Running the Successful MLM Company Conference will be here before you know it! On May 16th and 17th, 2013 we are hosting the MLM Conference for the 25th year! This is now our 64th annual conference (held almost consistently three times per year over the last 24 years). All executives/owners of MLM, direct selling, network marking, and party plan companies are welcome to attend. This is the original MLM Startup Conference, hosted and perfected by direct selling industry expert, MLM Attorney Jeff Babener. Call 503-226-6600 or 800-231-2162 to register. (Can’t make this event? Keep an eye out for our October and February conferences as well.)

Leave a Reply