Last year, browsing Facebook, I noticed a number of my friends, acquaintances, and childhood enemies appeared to have sprung hearty entrepreneurial streaks. I scrolled through opportunities to purchase a medley of dietary supplements, lavender-scented essential oils, weight-loss body wraps, and aesthetically questionable leggings.
The brands hyped in my News Feed have names that sound like new discount car models: Thrive, Plexus, Jamberry, Younique, LuLaRoe, doTerra. The people in my social media circle are participating in an update on an old premise, the “multilevel marketing company,” which is sometimes referred to as “direct sales” (or MLM for short). This is not a niche industry. In 2015, more than 20 million people in the U.S. attempted to earn extra income with these companies according to the Direct Sales Association. The vast majority (more than 77 percent) of these sellers were women; sales were over $36 billion.
Sellers use Facebook pages, Instagram stories, and Periscope streams to hawk their products. Some post self-made advertisements, an approximation of the #sponcon celebrities are often paid for, except in this case, the person advertising is on the hook for unsold product. “Almost all MLMs now rely on social media,” Robert FitzPatrick, the president of an organization called Pyramid Scheme Alert, told me over email.
This isn’t something that started on social media and percolated outward, but rather a sprawling racket that has officially gained a digital stronghold. Direct marketing companies have existed since long before social media. Personal-care juggernaut Avon has been slinging toiletries since 1886, and it originally sent its contractors door-to-door. Its early traveling salespeople are the ancestors of the current crop of MLM employees, except rapping on a stranger’s door has been supplanted by adding a high school best friend’s sister to a Facebook group.
Instead of selling products in stores, MLM companies employ independent contractors to buy their goods wholesale and to sell directly to their social circles. They incentivize sellers by paying them to cajole other people into also becoming sellers, a practice known as “establishing a downline.” The hook is that the original contractor will receive a passive income based on a percentage of the sales made by the people they recruit — so if you sign up a lot of people, you’ll earn more money, even if the people you persuade to participate suffer extreme financial losses. This setup is convenient for the people on the top of the organizations because the churn and failure rate among new recruits is high.
“In this business model, a business makes money from partner relationships where partners aren’t successful. I don’t want to say that 100 percent of the time it always happens, but the large portion of the income earned by upline distributors is earned based on the continued failure of recently recruited distributors,” William Keep, the dean of the College of New Jersey’s business school, told me.
Consumer advocate Bonnie Patten, executive director of an organization called Truth in Advertising, has investigated multilevel marketing groups and has observed their proliferation on Facebook and other platforms. “Social media has been aggressively used by this generation [of MLM sellers],” she told me. Patten noted that new product sellers sometimes use too-good-to-be-true promises about how easy it is to get rich from the comfort of home. “They tend to be quite deceptive about how much income distributors expect to make if they join these MLMs.”
For many of these companies, a small group of sellers do fulfill the lofty promises made and are often drafted into starring in promotional materials, becoming spokespeople. Often they are given flashy symbols of success. For Mary Kay cosmetics sellers, a bright pink Cadillac serves as a business acumen calling card; car bonuses are still a common reward for the few who reap substantial rewards from recruiting other sellers. But for the vast majority of people involved, these business ventures are doomed. What’s more, the small percentage of sellers on top end up profiting from the failure of the people below them. It’s often a vulture’s industry, with an extremely high churn rate disguised as salvation from stodgy 9-to-5 life.
The past 10 years have been an opportune time for MLMs. As the recession hit, social media became more prevalent, which meant that the pool of unemployed, underemployed, or simply struggling people was growing just as more avenues to recruit them — and allow them to recruit others and peddle wares — were exploding in popularity. And although the general economy has improved, the rise of the “gig economy” meant that attitudes about what work looks like have shifted dramatically in favor of the MLM model. As more people cobble together income through independent contracting work for companies like Uber, expectations about employee treatment have wilted. The concept of a company providing robust benefits and human resources for its employees now is seen as a luxury rather than perfunctory.
“It’s been useful for them in terms of being able to argue that they’re a lot like being an Uber driver. The problem that I have with the comparison is that most gigs, while they might be relatively low paid and have no benefits, don’t come with the same kind of risks that multilevel marketing does,” Stacie Bosley, an economics professor at Hamline University who studies how multilevel marketing companies operate, told me. “The other problem that makes it different from other gigs is the income promises that distort reality.”
A 2016 episode of Last Week Tonight With John Oliver explored the rampant deception of many MLMs, showing clips of sweaty, fervent recruiters promising riches and fulfilling lives to prospects. The show highlighted how many people get misled by this type of company and how many of these companies operate as pyramid schemes, although there is no easy way to ferret out whether a simply improbable sales strategy veers into illegality, especially since these companies are tight-lipped about their finances. “It’s quite an opaque industry,” Keep said.
A full-fledged illegal pyramid scheme is designed to create an endless chain of recruitment, one in which most participants do not recoup their investments into the business and therefore suffer financially. With multilevel marketing schemes, advancement is at least theoretically possible. This has been enough to allow many of these businesses to keep chugging. As long as companies can prove that they are engaged in a business practice where independent contractors are technically capable of making money by selling goods to outside customers (even if it’s unlikely), they have legal cover.
It’s important to note that not all multilevel marketing companies are considered illegal pyramid schemes. But enough of the companies have business structures which resemble pyramids that the industry has an earned reputation for scuzzy dealings. There have been attempts to establish a more clear-cut criterion to divide legitimate MLMs from pyramid schemes, but none have managed to create a standard. The Federal Trade Commission brought (but ended up losing) a case against major MLM Amway; but pursuing such cases can be difficult because many MLMs do not publicly break down which income comes from what source, so it is often difficult to gather evidence about which companies are acting deceptively.
Meanwhile — and this is important to note — there are also pyramid schemes that proliferate on Facebook and other social networks that are not multilevel marketing companies. Last winter, I was invited several times to join a feel-good project called the Secret Sister Book Exchange. The rules were odd: I was meant to purchase two books and send them to people; then I’d have to recruit other friends into the exchange; only after I’d recruited my friends and they’d recruited friends would I receive a windfall of books. Similar holiday-themed ploys called Blessing Loom and Wine Gift Exchange made their rounds on Facebook last year; and while they were loosely organized, they were pyramid schemes. “These so-called gifting circles that are all over social media right now are nothing more than illegal Ponzi schemes,” Mississippi Attorney General Jim Hood said at the time. “The only reason they keep circulating online is because the people who have paid money into a scheme are desperately recruiting others in hopes they can get their money back.” And as United States Postal Inspection Service spokesperson Paul Krenn told BuzzFeed at the time, every single person in the U.S. would have to buy in for the Secret Sister scheme to make sense by the time it got to the 11th round. (The USPS has, of course, dealt with old-fashioned versions of these hoax chains long before Facebook.)
Simply because a company is not flagrantly breaking the law or under investigation, of course, does not mean it is a smart business to join.
“After 15 years research, I and others have yet to find a MLM in which anyone makes a profit without recruiting others onto the chain,” FitzPatrick said. “I have not found a single MLM in which people make money only from their own ‘sales’ to external (retail) customers. The only people I have ever seen that made money (less than 1 percent of all that join) got it from their recruits who lost their money.”
Reporting on individual companies tends to illuminate FitzPatrick’s claims that these companies are not conducive to retail sales. Last year, a Complex story (written by my colleague Justin Charity) traced how rappers like Juelz Santana got caught up in Wake Up Now, a multilevel marketing scheme that went bankrupt in 2015 and essentially convinced people to pay for access to Groupon-like deals. Eighty-two percent of its sellers failed to make money.
While Wake Up Now’s failure to help sellers crashed its reputation, there are plenty of MLMs still happily operating with similarly dismal finances. It Works!, the weight-loss shrink wrap that’s omnipresent on Instagram, is hardly a pot of gold for prospective sellers. “The average salesperson earned only $937 in 2013 — and that’s before subtracting the costs of joining and staying in the company, which can be around $1,000 yearly, much of which goes to buying It Works! Product,” Business Insider wrote in a 2015 company profile. In other words, the average It Works! salesperson loses money.
LuLaRoe, a women’s clothing company started in 2012 by DeAnn Stidham, is one of the companies that frequently appears on my feed. Stidham’s inspiration tale is featured on the company’s website. “She was a single mother raising seven children and trying to balance time at work and at home. She was desperate to find a way to be at home, be a mom and provide for her family,” it reads. The company explicitly targets stay-at-home moms to become its salesforce. According to CBS Moneywatch, LuLaRoe made almost $1 billion in 2016, making it one of the largest MLMs. The company relies heavily on what Racked calls “Facebook pop-up parties.” It requires its contractors to buy expensive “onboarding” packages ranging from $4,925 to $9,000. Considering its signature leggings retail for around $25, that’s a whole lot of merch to sell before recouping the initial cost, and that’s not including any supplemental spending to hold “pop-up parties.”
The deliberate opacity of these business models often leave sellers confused or unclear about how much money they can expect to make. While YouTube is also home to many DIY multilevel marketing commercials, the video platform is also a destination for videos attempting to clarify companies’ confusing compensation plans. Some of the most incredible moments watching these videos is when a participant will explain the compensation plan as a pyramid by any other name. This compensation explainer by a doTerra “builder,” for instance, stresses the importance of persuading other people to join up and start selling themselves. She refers to this as the “Power of 3.”
Here’s a telling still:
Notice anything funny? How about now:
The FTC warns against signing up to sell for a MLM without doing your homework. “Apply a healthy dose of skepticism before buying or selling products advertised as having ‘miracle’ ingredients or guaranteed results. Many of these ‘quick cures’ are unproven, fraudulently marketed, and useless. In fact, they could be dangerous. You may want to check with a health professional before using them — or selling them,” its website reads.
Patten says that MLMs that sell nutritional supplements are especially prone to making misleading claims about their products. A Truth in Advertising investigation found that out of the nutritional supplement companies belonging to the Direct Sales Association, close to 97 percent made illegal health claims, either directly or through their distributors.
This is an industry riddled with misleading tactics that are, nevertheless, difficult for regulators to stomp out entirely. No company exemplifies the muddle more than Herbalife.
There are hundreds of MLMs operating today, but Herbalife’s legal fracas is by far the most representative of how fraught attempts to regulate them can be. Herbalife was founded in 1980, so it’s one of the most successful long-running MLMs. The nutritional supplement company’s net sales are in the billions, and as of 2017, it had approximately 4 million sellers worldwide. But, just like many MLMs, it wasn’t actually enriching many of those people.
When William Keep looked at the Herbalife seller income, he immediately noted how dismal they were for most of the sellers. Only 18 percent of the distributors were even eligible to make money because of Herbalife’s requirements for sales volume. Out of the people who were eligible to make money, the numbers were grim. “On average, 95.5 percent earned $627.55, which is equivalent of working 1.7 hours per week at the federal minimum wage.”
In 2012, hedge fund manager Bill Ackman declared that he would short sell Herbalife, essentially betting more than a billion dollars that the company would fail. He did so, he said, because Herbalife was “a complete fraud.” Ackman’s declaration sent Herbalife’s share prices plummeting, until fellow hedge fund manager Carl Icahn — who, as far as anyone can tell, was primarily motivated by the fact that he hates Ackman — decided to bet against the short and invest heavily in Herbalife. Meanwhile, Herbalife acknowledged that the FTC was investigating it.
In essence, the fight between Herbalife and the FTC became a proxy war for two of America’s richest hedge fund managers. “I am 100 percent convinced that Herbalife is a global pyramid scheme. We think it is a criminal operation,” Ackman told The Atlantic.
The FTC and Herbalife reached a settlement in 2016. Herbalife would pay a $200 million consumer relief, and it agreed to restructure its business. While the FTC complaint noted that Herbalife deceived hundreds of thousands of people and that the vast majority of Herbalife sellers made “little or no money,” it was not able to prove that the business was a pyramid scheme. “This settlement will transform the way Herbalife will conduct business in the future,” then–FTC Chairwoman Edith Ramirez said. The FTC sent checks to approximately 350,000 Herbalife victims who lost money selling its products. While the complaint explicitly forbade Herbalife recruiting staples like promises of lavish lifestyles and although the FTC openly referred to people as Herbalife’s “victims,” it still allowed the company to conduct business.
This was not good for Bill Ackman, whose hedge fund firm weathered heavy losses — $500 million — due to the failed short. It was very good for Carl Icahn, as the settlement also gave him the ability to buy more of the company. And while it sent a message to MLMs that the FTC was willing to attack, it also suggested the FTC was not adept at going in for the kill.
Though the monitoring and the restructuring may slow its growth, Herbalife recently reported healthy earnings, sending its stock soaring. This is certainly a short-term victory for the company, though; perhaps Ackman will be proved right eventually, and the restructuring will end up sinking Herbalife over the next few years. Even still, the Herbalife case was the FTC’s most aggressive attack on an MLM today, and although regulators were able to prove that the company was doing wrong, they did not shut it down, and the case does not appear to have significantly clipped the company’s wings.
Despite the oft-flamboyant claims made by many MLMs, the Federal Trade Commission is conservative in its approach to singling them out. The FTC goes after relatively few multilevel marketing companies. It has filed just 26 cases in 40 years against MLMs for operating as illegal pyramid schemes. While it either won or received a positive settlement in all of them, the relatively low rate of government action means that many companies flourish as they operate in a regulatory gray zone.
That’s not likely to change anytime soon.
“MLMs have worked very hard over more than a 20-year period to defang the regulations in states across the country, and they have gotten legislators to pass laws to give them more latitude to operate the way they want to,” William Keep told me. “This has been a grossly under-regulated industry, and that under-regulation is in part because the industry spends a fair amount of effort on lobbying.”
And as Slate pointed out in February, it’s a terrific time politically to operate a multilevel marketing company, as the Trump administration is stocked with people who have deep ties to the industry.
President Trump himself worked as a pitchman for a videophone MLM called ACN Inc., which he also promoted on Celebrity Apprentice. Housing and Urban Development Secretary Ben Carson also worked as an MLM pitchman for a dietary-supplements company called Mannatech; Texas Attorney General Greg Abbott called its sales plans an “elaborate scheme to defraud innocent consumers” in 2007. Meanwhile, Secretary of Education Betsy DeVos is the daughter-in-law of the billionaire cofounder of the largest MLM in the United States: Amway, the same company unsuccessfully sued by the FTC in the 1970s. And, of course, Herbalife’s savior Carl Icahn is one of Trump’s financial advisers.
“We think that with the new administration you can forget any aggressive action vs. MLMs,” Herbalife shareholder Tim Ramey wrote in a note to clients in January, as Slate reported. “When Betsy DeVos was named to the Trump Cabinet we took that as a very strong signal that the Trump administration had no real issue with the MLM world. … You don’t put Betsy DeVos in your cabinet and then go out and try to put [Herbalife] out of business. We are in a post-regulatory world.”
So the chances of a regulatory boom wiping out the onslaught of obnoxious social media posts hawking MLM wares is highly unlikely, and considering how successful bad actors in this industry have been at duping people into participating in a fixed system for decades, it’s also unlikely that people will realize that these companies aren’t a smart gambit. As government regulators have struggled to ferret out illegal MLMs, it’s tempting to look for other crackdown solutions.
I wouldn’t hold out hope that Facebook, Instagram, and other social networks will step in and start moderating these DIY advertisements in the same way that it has attempted to moderate clickbait and fake news. Considering how the issue has so thoroughly stymied regulators, it is too complex a task for social networks to tackle adequately, as removing business posts without first proving wrongdoing would likely lead to a rash of complaints. Or maybe Facebook could find a way to banish all multilevel marketing to its dreadful Marketplace tab. Even though I’ll never buy LuLaRoe pajamas or doTerra’s relaxation oils, I can still dream.