I recently took a trip to California. While on the beach I watched my children build a sandcastle complete with seashells and sticks which they gathered along the shore. They keep the sandcastle at least a few yards from where the waves crashed in an attempt to make sure it would not be washed away. Little did they know, the tide would bring the waves beyond where the castle was being built. As a result the castle was eventually washed away. It was interesting to see them rush to build a wall to protect their castle from the incoming waves all to no avail.

Today we can see that a changing tide is coming within the MLM and Direct Sales industry. Some may say that it is more of a tsunami than a wave with the recent decisions from the Federal Trade Commission (FTC) against companies such as Vemma as an alleged pyramid scheme.

So what are some things you can do to make sure you build your castle as far from the incoming wave as possible? I looked at many of the criteria that the SEC, FTC, FBI and state attorneys general mentioned as things to look at to make sure you are not in the path of possible destruction. Here is a list of warning signs that an MLM distributor might want to look into when evaluating their stance against the rising tide. MLM business owners will want to take note to avoid these things in their businesses.

  • Emphasis on recruiting. If a program primarily focuses on recruiting others to join the program for a fee, rather than focusing on product sales, it is likely a pyramid scheme. Make sure you will receive more compensation for product sales than for recruiting others.
  • Promises of high returns in a short time period. Avoid companies that make pitches for exponential returns and “get rich quick” claims. High returns and fast cash in an MLM program may suggest that commissions are being paid out of money from new recruits rather than revenue generated by product sales.
  • No genuine product or service. Legitimate MLM programs involve selling a genuine product or service to people who are not in the marketing program. Potentital MLM distributors should avoid companies where there are no underlying products or services being sold to others, or if what is being sold is speculative or appears inappropriately priced.
  • Easy money or passive income. Avoid compensation schemes that base pay in exchange for little work, such as making payments, recruiting others, and placing advertisements.
  • No demonstrated revenue from retail sales. Ask to see documents, such as financial statements audited by a certified public accountant (CPA), showing that the MLM company generates revenue from selling its products or services to people outside the marketing program.
  • Buy-in required. The goal of an MLM marketing program is to sell products. Be careful if you are required to purchase an enrollment package or pay a fee to participate in the marketing program, even if the buy-in is a nominal one-time or recurring fee (e.g., $10 or $10/month).  There needs to be a free way provided to participate in the marketing program, though annual or monthly account/online maintenance fees are sometimes part of doing business.
  • Complex commission structure. Make sure commissions are mainly based on products or services that you or your recruits sell to people outside the marketing program. If you do not understand how you will be compensated, get understanding and be cautious.