What Is Pyramiding In Multilevel Marketing (MLM) Plans?

Contributed by mm | October 7, 2006 3:52 PM PST

Whether an MLM offers incentive to recruit new distributors is the crucial test of whether the MLM plan is legal or not. Here is the take from FTC:

From FTC:

If a plan offers to pay commissions for recruiting new distributors, watch out! Most states outlaw this practice, which is known as "pyramiding." State laws against pyramiding say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors.

Why is pyramiding prohibited? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people -- except perhaps those at the very top of the pyramid -- lose their money.

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