MLMs as Pyramid Schemes (Vemma Shut Down)

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vemma logoMulti-level marketing companies – – MLMs for short – – go to great lengths to distance themselves from pyramid schemes. The Direct Selling Association (a lobbying group funded by multi-level marketing companies that helps ensure our government continues to allow MLMs to operate) says that legitimate MLMs have legitimate products or services for sale and base compensation primarily on the sales of projects. In contrast, they say that pyramid schemes focus on recruiting and base compensation on recruiting.

In reality, multi-level marketing companies have products that are simply a “front” for the real business, which is recruiting. They talk about all the riches distributors can earn, knowing that almost everyone who participates will lose money. (And when those losses inevitably occur, the companies say it is the fault of the distributors who must not have worked hard enough.)

And yesterday, the FTC took steps toward shutting down one MLM, Vemma, saying:

At the Federal Trade Commission’s request, a federal court has temporarily halted an alleged pyramid scheme, Vemma Nutrition Company, that lures college students and other young adults with the prospect of getting rich without having a traditional 9-to-5 job. The FTC seeks to stop the operation, which earned more than $200 million annually in 2013 and 2014 and has affected consumers throughout the United States and in more than 50 other countries, from continuing as an unlawful pyramid.

“Rather than focusing on selling products, Vemma uses false promises of high income potential to convince consumers to pay money to join their organization,” said Jessica Rich, Director of the FTC’s Bureau of Consumer Protection. “We are also alleging that Vemma is an illegal pyramid scheme.”

Vemma is a multilevel marketing company that claims to use its members, called “affiliates,” to promote its health and wellness drinks. According to the FTC’s complaint, the defendants claim affiliates can earn substantial income by enrolling others either as affiliates or as customers, but Vemma focuses on recruitment rather than retail sales of its products to generate this income. The vast majority of participants make no money, and most of them lose money.

The FTC criticizes Vemma’s promotion of the riches distributors can amass, also saying:

Consumer losses are inevitable because Vemma is an illegal pyramid scheme that rewards affiliates for recruiting participants rather than for selling products, the FTC alleges. The defendants provide affiliates little guidance for selling products, but instead teach them to give away products as samples when recruiting new participants. Vemma offers no meaningful discounts or incentives to encourage retail sales, according to the complaint.

In addition to allegedly running an illegal pyramid scheme, the defendants are charged with making false earnings claims, failing to disclose that Vemma’s structure ensures that most people who join will not earn substantial income, and furnishing affiliates with false and misleading materials to recruit others.

What you will see now is other MLMs rushing to distance themselves from Vemma. They will put out materials showing how they are “different” from Vemma. Don’t be fooled. All MLMs are virtually the same, and all MLMs are essentially pyramid schemes. Of COURSE they have to say that they are not pyramid schemes. But a leopard can’t change its spots.

Nearly all multi-level marketing companies primarily encourage recruiting. They talk about the products enough to make it appear that the products are the focus. They say they encourage product sales. In reality, the bulk of the products are sold to distributors who have little chance of being able to resell them for a profit.

More importantly, the structure of all MLMs ensures that most people who join will not earn substantial income. In fact, almost everyone will lose money.

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