Multi-level marketing
[8][9][10] Nonetheless, MLM companies function because downline participants are encouraged to hold onto the belief that they can achieve large returns, while the statistical improbability of this is de-emphasized.
MLM companies have been made illegal or otherwise strictly regulated in some jurisdictions as merely variations of the traditional pyramid scheme.
[14] Indeed, the largest proportion of participants must operate at a net loss (after expenses are deducted) so that the few individuals in the uppermost level of the MLM pyramid can derive their significant earnings.
[citation needed] MLM companies have been made illegal in some jurisdictions as a mere variation of the traditional pyramid scheme, including in China.
According to the U.S. Federal Trade Commission (FTC), some MLM companies already constitute illegal pyramid schemes even by the narrower existing legislation, exploiting members of the organization.
Legal claims against MLM companies cover a wide range of issues, including accusations that their operations closely resemble illegal pyramid schemes.
Furthermore, MLMs are often scrutinized for having complex and exaggerated compensation schemes, making it difficult for most participants to earn significant income.
Major revenue for the company, or its leading distributors, often comes from participant-attended conventions, training sessions, and sales of promotional materials, adding another layer of financial burden on members.
Some MLM organizations have also been accused of using cult-like techniques to build enthusiasm and loyalty among their members, which has raised additional ethical concerns.
Critics have argued that the use of these and other different terms and "buzzwords" is an effort to draw distinctions between multi-level marketing and illegal Ponzi schemes, chain letters, and consumer fraud scams—where none meaningfully exist.
[12] O'Regan wrote 'With this regulation China makes clear that while Direct Sales is permitted in the mainland, Multi-Level Marketing is not'.
[11] MLM companies have been made illegal in China as a mere variation of the traditional pyramid scheme and as disruptive to social and economic order.
[49] Some multi-level marketing sellers have circumvented this ban by establishing addresses and bank accounts in Hong Kong, where the practice is legal, while selling and recruiting on the mainland.
In a 2004 Staff Advisory letter to the Direct Selling Association, the FTC states:Much has been made of the personal, or internal, consumption issue in recent years.
In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme.
[23]In re Amway Corp. (1979), the Federal Trade Commission indicated that multi-level marketing was not illegal per se in the United States.
[60][61] The FTC advises that multi-level marketing organizations with greater incentives for recruitment than product sales are to be viewed skeptically.
[62] In a settlement with the founders of Vemma, the FTC ordered their future businesses require that a majority of sales be made to the general public, and not oneself or other distributors.
[63] Walter J. Carl stated in a 2004 Western Journal of Communication article that "MLM organizations have been described by some as cults (Butterfield, 1985),[64] pyramid schemes (Fitzpatrick & Reynolds, 1997),[65] or organizations rife with misleading, deceptive, and unethical behavior (Carter, 1999),[66] such as the questionable use of evangelical discourse to promote the business (Höpfl & Maddrell, 1996),[67] and the exploitation of personal relationships for financial gain (Fitzpatrick & Reynolds, 1997)".
[69] MLM companies are also criticized for being unable to fulfill their promises for the majority of participants due to basic conflicts with Western cultural norms.
[74] Industry critic Robert L. FitzPatrick has called multi-level marketing "the Main Street bubble" that will eventually burst.
[75] Many Islamic jurists and religious bodies, including Permanent Committee for Scholarly Research and Ifta[76] of Saudi Arabia, have considered MLM trade to be prohibited (haram).
