MLM Scams: Are MLMs Preying on the Dream of Entrepreneurship?

What is an MLM?

MLMs are legal businesses that focus on direct marketing, home-business franchising, network marketing, affiliate marketing or direct sales operations. Most MLMs recruit independent sales representatives to sell products directly to consumers instead of selling them in a retail store. These sales reps, or distributors, make money when they sell products; they also earn commissions from products sold by people they recruit to the operation (their “downline”). 

“It’s different than a traditional sales job in that the salespeople, often called distributors or associates in the MLM world, earn money not only by selling products, but by recruiting others to join the MLM business,” explained Jason Zirkle, training director at the Association of Certified Fraud Examiners. 

What is an MLM scam?

An MLM scam is a business that focuses more on recruiting new members than selling real products, often making big promises about income while requiring you to spend your own money up front. 

“An MLM becomes a scam when the focus shifts from selling products to recruiting others,” explained Dr. Mara Einstein, a leading academic expert on MLMs and author of Hoodwinked: How Marketers Use the Same Tactics as Cults. “Most reps lose money, and claims of income potential are deceptive.”

MLM scams dazzle potential victims with promises of easy work and an envious lifestyle, but frequently leave those who fall for the scam worse off. They tend to prey on vulnerable people and communities, pressuring them to invest up front and recruit others — often friends and family in similarly insecure situations.

“Fake MLMs promise profits by getting more and more people to buy into the scheme rather than legitimate recurring sales to customers,” explained Robert Persichitte, a certified fraud examiner and a financial planner with Delagify Financial. “They will promise freedom from work, prestige as an independent business owner or huge profits to get people to pay them high fees and costs to buy into the scheme.”

Are MLM scams illegal?

While MLM scams are deceptive and often result in financial loss, many are not considered illegal. Laws exist to protect people from fraudulent investment practices, such as Ponzi schemes, but MLM scams can operate legally if they involve a real product or service.

“The Federal Trade Commission has a rule that MLM companies are legal as long as they derive 70 percent of their revenue from selling a product rather than new recruit fees, called the FTC 70/30 rule,” Zirkle explained. However, some types of MLM scams are unethical but still operate legally under the 70/30 rule. 

Zirkle cautioned that this gray area can cause confusion. “For example, an MLM may sell a great product, but they force recruits to load up on inventory, or they exaggerate income claims to bring in recruits,” Zirkle said. “Or, they may not exaggerate income claims, but they sell a product that’s been proven over and over to be ineffective.”

One well-known example is Metabolife, a multilevel marketing company that faced legal action not because of its revenue structure, but due to the adverse effects of its product. Eventually, the FDA banned the active ingredient in Metabolife, and the company went out of business.

MLM scams vs. pyramid schemes

You’ll often hear the term “pyramid scheme” discussed when referencing MLMs, both legitimate and scam ones. Pyramid schemes are a type of MLM scam, but they’re always illegal. They generate money almost entirely by recruiting new people, not by selling real products. In contrast, MLM scams often involve a legitimate product, which keeps them technically legal; however, they typically employ shady tactics, such as pressuring recruits or making misleading income claims.

“The FTC draws the line at sales versus recruitment,” explained Jeremy Heck, consumer law attorney at Luftman, Heck & Associates. “In a legal MLM, the product matters. People outside the company really buy it. The only ‘product’ in a pyramid scheme is recruiting more people into the system.”

In short, if the focus is on selling to real customers, it may be a legal MLM. If the focus is on recruitment and sales reps buying their own inventory, it may be a pyramid scheme — and that’s illegal.

MLM scams vs. legitimate MLM companies

While MLM scams often make headlines, some MLMs are legitimate business opportunities. “MLMs get a bad rap because so many of them are scams, but there are some legitimate reasons to participate in one,” Persichitte said. 

He noted that MLMs can make sense when a product benefits from in-person demonstrations and word-of-mouth sales over traditional marketing. One of the most well-known examples is Tupperware.

“At the time, it was a very innovative product,” said Persichitte. “The items had a high markup, but people couldn’t easily test the products at a store or through a demonstration. Like all legitimate MLMs, it had two things in common: first, profits came from a legitimate product, and second, there was a legitimate need to market the product this way.”

Still, it can be hard to discern a legitimate MLM opportunity from an MLM scam. Einstein offered the following list of characteristics to help you spot real companies and scammers. 

Pros of legitimate multilevel marketing companies

Many MLMs, such as Amway and Avon, have stood the test of time and are considered legitimate. Here are some of the upsides of joining a legitimate MLM:

1. MLMs can be an easy way to start selling. 

Many people want to start and run a one-person business, but launching one successfully can be challenging, particularly without the necessary skills and experience. An MLM offers a chance to build connections and start selling without many of the risks associated with starting a new venture. Plus, MLMs offer distributors flexible schedules that most traditional jobs can’t provide and give you a distinct marketing plan.

“If the company is ethical and sells a product people genuinely want, MLMs can offer flexibility and a low-cost way to start selling something,” said Zirkle. “You’re essentially buying into a ready-made system, with marketing materials, product lines and a business structure already in place.”

2. Some MLM products are in high demand. 

MLMs flourish in the makeup, jewelry, lotion, soap, essential oil and clothing industries, to name a few. There are always new releases, keeping demand for the products high. 

“Many people are looking for innovative, high-quality products that will meet their needs,” noted Daniel Foley Carter, director at SEO-Audits.io. “The majority of these folks are fed up with the commercial brands that supermarkets and shopping malls make available to them.”

3. MLMs give people a chance to work on their sales techniques. 

Gaining sales experience can be valuable, helping you learn to win customers over the phone and build a positive sales culture. “MLMs encourage personal development, confidence-building and sales training,” said Zirkle. “Many hold conferences where attendees can learn from the more successful members in the MLM. For people who stick with it, it can be a crash course in learning how to sell, build relationships and speak publicly.”

Cons of multilevel marketing companies

While even the business practices of legitimate MLMs can raise concerns, when companies cross over into scam and pyramid scheme territory, there are even more red flags and worries about predatory behavior. 

1. Predatory MLMs prey on vulnerable people.

Direct sales companies sometimes build sales teams by targeting people with limited employment options or who aren’t savvy about local business practices. People in close-knit communities are also ideal targets because they have broad social networks. 

“MLMs actively target individuals who are financially or emotionally vulnerable — especially women, young mothers and those in transitional life phases,” Einstein cautioned. “Recruiters often use flattery, promises of empowerment, and appeals to community and ‘self-made success’ to hook people.”

The following groups are particularly vulnerable:

• Stay-at-home parents: Shady MLMs often target stay-at-home parents, typically mothers, seeking flexible work they can do from home. These individuals often have broad social networks and want paid work that fits into a flexible schedule. They’re often lured by “direct sales” positions that seem like a great path to entrepreneurship but may require unsustainable investments of time and money.
• Immigrants, minorities and lower-income communities: Predatory companies also target recent immigrant communities, minority communities and lower-income communities worldwide. Many of these groups are known for valuing family and community, are upwardly mobile and have close, trusting connections. A single foothold in a tight-knit community is valuable for recruitment because communities that value cohesion will likely produce more recruits or, at the very least, more buyers.

2. Predatory direct sales companies purposely hide sales data.

Shady MLMs tend to hide or distort their sales associates’ financial results. They may offer misleading information or bury the real numbers where few people will look.

“Many highlight top earners in their marketing but don’t show that the vast majority of participants make little or no profit,” Zirkle said. “Some bury their income disclosures in fine print or make them hard to find.”

Due to the pressure to recruit new people, many MLM reps will say they “can’t tell you” how much money they make but can say how much they or their team have sold. Their “team” might be their entire upline and downline sales group, which could be hundreds of people. If the team sold “millions” in goods, they could be referring to how much the company says the product is worth, not its list price.

Direct sales consultants are often required to purchase stock before they sell it. So even if a hypothetical representative sells $10,000 in goods, they must subtract what they paid for the products and the percentage an upline manager receives. You could sell many products and barely break even.

“Even when income disclosures exist, they exclude expenses, taxes and unpaid labor,” Einstein explained. “They rarely disclose that most participants lose money.”

3. MLMs offer no guaranteed income or benefits.

Unlike traditional hourly or salaried jobs, joining an MLM doesn’t guarantee a paycheck. You’ll only be successful if you have a knack for sales — and formal training usually isn’t provided. You also need an audience willing to buy the products and must have ample time to invest in business-building and networking.

“If someone isn’t a good salesperson to begin with, and most people aren’t, they won’t be successful in an MLM,” Einstein cautioned. She also pointed out that the commission structure mostly benefits the higher-ups. “The top 1 percent usually earn the bulk of commissions, while the majority make little or nothing.”

As an MLM salesperson, you’re essentially a contractor. You won’t receive an employee benefits package with health insurance, PTO and other perks. While you have flexibility in when or where you work, you must weigh that against the security and additional compensation traditional jobs provide.

Additionally, many of the benefits MLMs promise are exaggerated, and members often end up spending their own money.

“Participants often spend their own money on products, travel and event fees without seeing real returns,” said Zirkle. “MLM marketing can be emotional and persuasive, selling the idea of financial freedom or a luxurious lifestyle. But for most people, those promises don’t come true.”

4. MLMs require long hours with uncertain rewards.

To make significant income through an MLM, you must devote hours daily to building and maintaining the business. Even if the organization offers guidance, mentors or personalized sales materials, you’ll likely handle numerous business tasks yourself:

• You’ll have to spend time educating your audience about your products. 
• You’ll handle all product demos, in-person networking events and social media marketing campaigns solo. 
• You’ll be responsible for delivering products, handling unhappy customers and processing returns. 
• You may quickly burn through your immediate circle and have to pressure your contacts to find new potential leads.

Depending on your target audience, you may end up selling in the evenings or on weekends, when you normally spend time with family or friends.

“It’s often framed as a ‘work when you want’ opportunity,” Zirkle said. “But the reality is that many people work long hours for little pay, especially if they’re trying to build a network of recruits.”

5. MLMs can strain personal and social relationships.

Even in the case of legitimate MLMs, distributors often have to generate sales leads on their own. This leads many participants to turn to their social circles to make a sale.

“Social relationships can suffer if people feel pressured to buy or join the business,” Zirkle warned. “Many MLMs encourage participants to aggressively sell products or recruitment to family and friends.”

That pressure can negatively impact relationships, which adds a social cost to the potentially high financial costs of becoming involved with an MLM. If the product sold is faulty or dangerous, or if a loved one joins a fraudulent MLM and loses money, the damage to the relationship could be serious.

How MLMs use social media in their operations

MLMs, both legitimate and predatory, often engage their audience on social media for sales and recruitment purposes. Here are some of the common tactics they use: 

• Success language: MLMs use language that resonates with participants’ entrepreneurial dreams. They call recruits “entrepreneurs” and “business owners” and encourage them to refer to themselves as such. The allure of suddenly being able to say “I’m a business owner” or “I’m an independent consultant” for just a small down payment on goods is powerful.
• Lifestyle imagery: Sales reps are encouraged to share images of themselves and their families on social media to increase sales and attract recruits. For example, if the MLM products are health-related, reps may use before-and-after photos to show the products’ results on a personal level. “It can be hard to tell what’s real and what’s part of a carefully curated sales pitch,” said Zirkle. “Some companies even coach their reps on how to post in a way that looks personal but is actually part of a broader marketing strategy.”
• Wealth and luxury images: Many prolific posters share aspirational lifestyle shots to sell the idea that it’s easy to make a generous side income, or even fund an upper-middle-class lifestyle, via direct sales. “They use platforms like Instagram and TikTok to sell a dream, but most of what you see is just hype and anything but financially transparent. The marketing is emotional and aspirational, not factual,” said Heck. Members who post about their fabulous lifestyles are usually at the top of the sales pipeline and represent only a very small percentage of sellers. Unfortunately, very few people reach that level.
• Relationship leverage: Many people who join MLM companies have an extensive network of family, friends and acquaintances they’re connected to on social media. Those connections provide MLMs with a built-in audience for product demos, sales pitches and lifestyle posts meant to recruit more members. However, MLMs often focus their strategy on the most vulnerable. “MLMs train reps to exploit personal relationships for sales and recruitment, often targeting pain points, such as money stress, loneliness and dreams of flexibility,” said Einstein.
• Live sales events online: MLM sellers often try to move excess inventory by livestreaming video on platforms like Instagram Live and Facebook Live. For example, the women’s clothing brand LuLaRoe used this tactic when sellers received new shipments of leggings, dresses or tunics. They would promote the event for weeks, build anticipation and preview new styles to attract buyers. This strategy can work if you have a large, engaged following, but without one, it often falls flat. It’s also not great for repeat business. How many printed leggings or scented candles can someone really buy? Most customers aren’t purchasing something from every livestream.

How to protect yourself from an MLM scam

If you or someone you know is considering joining an MLM company, here are some research tips and red flags to consider to make sure the opportunity is legitimate and not a scam:

1. Research the company online: Conduct an online search to get a general idea of what people say about the company. Also, search the company name with the word “scam” to see if it’s associated with any controversy. While reviewing sources, pay particular attention to mentions of “pyramid scheme” and claims that it bankrupted people.
2. Look at the company’s financial records: Search for the business’s financial statements to get a feel for how the company is performing and how much money people are actually earning. “Ask to see an income disclosure statement,” Zirkle recommended. “Legit companies usually publish one. It often reveals that the vast majority of people earn little to no money, which might tell you more than the flashy success stories they promote.” Another red flag is when financial information is hard to find or seems intentionally vague.
3. Pay attention to a recruiter’s behavior: Be wary if a recruiter is particularly persistent in getting you to sign up with the company. If being a sales rep with the company is such an amazing experience, a hard sell shouldn’t be necessary. If the recruiter is a family member or friend trying to make you feel guilty or accusing you of not trusting them, that’s also a red flag. Other signs include constant company promotion and vague answers about how much they’re earning.
4. Consider how the recruiter speaks to you. If they brag about their lifestyle and income to convince you to join, be skeptical. Legitimate professionals don’t boast about salaries or flashy lifestyles when recruiting. “Watch out for big income promises that sound too good to be true,” warned Heck. “And ask yourself, is anyone buying this who isn’t involved? If the answer’s no, that’s a big red flag.”
5. Be skeptical if you must pay money to start working: Most legitimate sales jobs do not require salespeople to buy the goods they will sell. Even legitimate commission sales jobs — pharmaceutical sales, auto sales, real estate, retail or telemarketing — don’t require an initial personal investment. “Be wary if you’re being asked to buy a bunch of inventory up front or pressured to pay for pricey ‘training’ or events,” advised Heck. 

Mona Bushnell contributed to this article. Some source interviews were conducted for a previous version of this article.