FTC FACTS for Consumers

FOR THE CONSUMER 1-877-FTC-HELP

ftc.gov FEDERAL TRADE COMMISSION

The Bottom Line About 

Multilevel Marketing Plans 

and Pyramid Schemes

M ultilevel or “network” marketing plans are ways to sell goods or services through distributors. Typically, these plans promise that if you sign up as a distributor, you’ll 

get commissions not only from the sales you make, but also from the sales of the people you 

recruit to become distributors. These recruits sometimes are called your “downline.” 

Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It’s best not to get 

involved in plans where the money you make is based primarily on the number of distributors you 

recruit and your sales to them, rather than on your sales to people outside the plan who intend to 

use the products. 

Joining a pyramid is risky because the vast majority of participants lose money to pay for the 

rewards of a few people at the top. 

How can you tell the difference between a bona fide multilevel marketing plan and a pyramid 

scheme? According to the Federal Trade Commission, the nation’s consumer protection agency, it 

takes research, some business sense and a healthy share of skepticism. 
Facts for Consumers 

Evaluating a Plan 

What’s involved in doing research? Asking your 

sponsor and other distributors tough questions, 

and digging for details. Don’t consider it nosy 

or intrusive: you are on a mission to check out a 

potential opportunity that will require your money 

and your time. 

1. Find — and study — the company’s track 

record. Look for newspaper or magazine 

articles about the 

company. Do an 

internet search. Look 

through several pages 

of search results to 

get a good idea of the 

information available 

about the company. 

• How long has the 

company been in 

business? Does 

it have a positive 

reputation for 

customer satisfaction? 

• What can you find 

out about the product 

and the service? 

• What’s the buzz 

about the company and the product on 

blogs and websites? 

• Has anyone sued the company for 

deceptive business practices? Checking 

with your local Better Business Bureau, 

Chamber of Commerce and state Attorney 

General for complaints about any company 

you’re considering investing in is a prudent 

thing to do. But remember that a lack of 

complaints doesn’t guarantee a company’s 

legitimacy. 

2. Learn about the product. What will you be 

selling? Are similar products on the market? 

Is the product priced competitively? Is it 

safe? Can your sponsor — the distributor 

who is recruiting you — support claims about 

the product’s performance?

3. Ask questions. Ask your sponsor for 

the terms and conditions of the plan: the 

compensation structure, your potential 

expenses, support for claims about how 

much money you can make and the name 

and contact information of someone at the 

company who has details about the terms 

and conditions and can tell you how much 

the average distributor makes before and 

after expenses. Get this information in 

writing. Avoid any plan where the reward 

for recruiting new 

distributors is more than 

it is for selling products 

to the public. That’s a 

time tested tip-off to a 

pyramid scheme. 

Multilevel marketing 

plans usually base at least 

part of your monthly 

income and bonuses 

on the sales of the 

distributors you recruit. 

Keep in mind that if you 

solicit new distributors, 

you are responsible for 

the claims you make 

about how much money 

they can earn. Be honest, 

and avoid making 

unrealistic promises. If the promises fall 

through, you could be held liable, even if 

you are simply repeating claims you read in 

a company brochure or advertising flyer, or 

heard from another distributor.

 If you don’t understand something, ask for 

more information until it is absolutely clear 

to you. Your sponsor and other distributors 

should be willing to answer your questions. 

Be skeptical and carefully evaluate the 

information you get. Remember that your 

sponsor and other distributors above you 

likely will make money if you join the 

program. So take your time, and don’t yield 

to pressure to join.

Yes, it’s a pyramid scheme!

• Do distributors sell more 

product to other distributors 

than they do to the public? 

• Does the amount of money 

distributors make depend more 

on recruiting, (that is, getting 

new distributors to pay for the 

right to participate in the plan)?

• Does the money made depend 

mostly on selling to other 

distributors than on sales of the 

product to the public?
Facts for Consumers

4. Understand any restrictions. Get the 

company’s refund policy in writing. Make 

sure it includes the process for returns as 

well as restrictions on — or penalties for 

— returning unused products if you choose 

to leave the plan. It may seem like you’re 

minimizing your risk if you can return 

products for a reimbursement, but policies 

vary on getting full refunds — and how long 

it could take. 

Many plans require you to buy training or 

marketing materials or pay for seminars if 

you want to get product discounts or create 

your own network of distributors. Find out 

how much time and money other distributors 

spent on training, marketing materials and 

seminars when they joined the plan, and 

whether the plan requires you to participate 

in periodic training. What happens if you opt 

out of the training?

5. Talk to other distributors. Ask your 

sponsor for the names and contact 

information for distributors at all levels of 

the plan. Get in touch with them to ask the 

same questions you asked your sponsor. 

In most plans, “upline” distributors stand 

to benefit when you buy into the system, 

so they should be willing to answer your 

questions with specifics.

If you get vague answers or guesses, ask 

follow-up questions until you hear — and 

understand — the information you need to 

make your decision. Be aware that there may 

be shills — “decoy” references paid by the 

company or distributor to pretend they had 

success earning money through the plan.

6. Consider using a friend or adviser as a 

neutral sounding board or for a gut check. 

You may want to consult with an accountant, 

a lawyer or another person you trust who 

is not affiliated with the plan to review the 

terms of compensation, determine whether 

the plan can back up any claims about the 

Asking Questions

Here are some important questions to ask 

your sponsor and distributors at different 

levels of the organization. Their responses can 

help you detect false claims about the amount 

of money you may make and whether the 

business is a pyramid scheme.

1. What are your annual sales of the 

product? How much product did you sell 

to distributors? What percentage of your 

sales were made to distributors? 

One sign of a pyramid scheme is if 

distributors sell more product to other 

distributors than they do to the public. 

2. What were your expenses last year, 

including money you spent on training 

and purchasing products? How much 

money did you make last year — that 

is, your income and bonuses minus your 

expenses? How much time did you spend 

last year on the business? How long have 

you been in the business? How many 

people are in your downline?

It’s important to get a complete picture 

of how the plan works: not just how 

much money distributors make, but also 

how much time and money they spend 

on the plan, how long it takes to make 

money and how big a downline is needed 

to make money.

3. What percentage of the money you 

made — income and bonuses minus your 

expenses — came from recruiting other 

distributors and selling them inventory or 

other items to get started?

Another sign of a pyramid scheme is if 

the money you make depends more on 

recruiting — getting new distributors to 

pay for the right to participate in the plan 

— than on sales to the public.
Facts for Consumers

1-877-FTC-HELP FOR THE CONSUMER

FEDERAL TRADE COMMISSION ftc.gov

October 2009

Federal Trade Commission

Bureau of Consumer Protection

Division of Consumer and Business Education

amount of money you can make, and analyze 

the information you’ve gathered and the 

answers to your questions. 

7. Take your time. Don’t pay or sign any 

contracts in an “opportunity meeting.” Take 

your time to think over your decision. Your 

investment requires real money, so talk to 

the distributors in settings that make you 

comfortable and when there’s the opportunity 

to take your time. 

8. Think about whether this plan suits your 

talents and goals. Ask yourself whether 

you would enjoy selling products to the 

public. Find out how many hours a week 

your sponsor and other distributors spent on 

the business when they joined the plan and 

how much time they spend now. Remember 

that no matter how good a product and 

how solid a multilevel marketing plan may 

be, you’ll need to invest sweat equity and 

money for your investment to pay off. 

Consider the other demands of the business 

— for example, training, recruiting new 

distributors, managing paperwork, inventory 

and shipping — and factor how much time it 

could take to achieve the amount of money 

you anticipate. 

The FTC works for the consumer to prevent 

fraudulent, deceptive and unfair business practices 

in the marketplace and to provide information 

to help consumers spot, stop and avoid them. 

To file a complaint or to get free information on 

consumer issues, visit ftc.gov or call toll-free, 

1-877-FTC-HELP (1-877-382-4357); TTY: 

1-866-653-4261. The FTC enters consumer 

complaints into the Consumer Sentinel Network, a 

secure online database and investigative tool used 

by hundreds of civil and criminal law enforcement 

agencies in the U.S. and abroad.