MLM Companies to Avoid 2023: Pyramid Schemes Exposed

As we dive into the world of multi-level marketing (MLM) companies, it's essential to separate the good from the bad. In this section, we'll expose some of the MLM companies to avoid in 2023, highlighting their pyramid scheme nature.

One such company is LuLaRoe, which has been accused of being a pyramid scheme due to its emphasis on recruiting new members over selling products. In 2019, LuLaRoe was even sued by the Washington State Attorney General for allegedly operating a pyramid scheme.

Another company to watch out for is Young Living, a popular essential oil brand that has been criticized for its business practices. In 2020, the company was fined $600,000 by the Federal Trade Commission (FTC) for making false claims about its products.

Some MLM companies prioritize recruiting over selling products, which can lead to financial losses for their members.

Curious to learn more? Check out: What Is a Pyramid Scheme

MLM companies operate without intermediary retail stores, selling products directly to consumers through a network of distributors.

Products are sold through a network of distributors set up to resemble a pyramid, where each distributor recruits and trains additional distributors.

In this structure, distributors earn commissions on their sales, as well as on the sales made by those they recruit.

Because of their pyramidal structure, multi-level marketing companies can sometimes be pyramid schemes.

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I've seen firsthand how some MLM companies can be more focused on recruiting than selling products, which can be a major red flag. Amway, for example, settled a class-action lawsuit in 2010 for $54 million over deceptive business practices and misleading its independent business owners (IBOs) about potential earnings and expenses.

LuLaRoe's business model is also worth avoiding. The company fired all its warehouse workers in 2019, just before Christmas, due to financial struggles. This is likely a result of the numerous lawsuits and complaints filed against the company, including a class-action lawsuit alleging it's a pyramid scheme.

If you're considering joining an MLM, be cautious if the company requires you to buy a large inventory upfront or pressures you to recruit others to join. Primerica, for instance, has faced lawsuits over its high-pressure sales and recruiting tactics, which can be overwhelming and lead to financial losses.

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AdvoCare paid $150 million to settle charges from the FTC that it had operated as an illegal pyramid scheme.

Recruiting took priority over sales, and the company was alleged to have inflated its profits to mislead investors. AdvoCare misled recruits by inflating their potential earnings and misrepresenting their upfront costs, which included thousands of dollars worth of merchandise.

Younique's presenter status system proved impossible for many to climb, with eight different tiers that required constant purchasing of merchandise to maintain. This led to inventory piling up, expenses growing, and unbearable pressure from the company.

In 2019, Younique settled an unrelated class-action lawsuit for $3.25 million. This highlights the importance of doing your research before joining an MLM.

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Primerica is a legitimate company with a long history, but its business model is built on high-pressure sales and recruiting.

Most people join Primerica with no background in insurance, yet they're pushed to sell complicated products quickly.

The company's primary focus is on recruiting new people to join the downline, which is the only way to make real money, but almost none of its reps do.

Primerica went public in 2010, and Business Insider wrote an article calling it a "multi-level marketing scheme."

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Amway is a health, beauty, and homecare MLM that's been in the spotlight for its questionable business practices. The company has faced multiple lawsuits, including a 2010 class-action lawsuit that resulted in a $54 million settlement over deceptive business practices and misleading its independent business owners (IBOs) about earnings and expenses.

Amway's own website even had to publish a post titled "Is Amway a pyramid scheme?" to address the concerns of its IBOs, who have a lot of legal precedent to back up their case. The company has been accused of operating as a pyramid scheme, with a focus on recruiting new members over selling actual products.

In 2020, a California-based suit alleged that Amway is indeed a pyramid scheme, despite its website's claims to the contrary. This isn't the first time Amway has faced allegations of this nature, and it's clear that the company's business model has raised some serious red flags.

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Pyramid schemes use products or services to disguise their true intention of collecting money from investors, while legitimate multi-level marketing companies emphasize reliable products or services.

A legitimate multi-level marketing company will buy back unsold merchandise, although often at a discount from the original price, whereas pyramid schemes often refuse to repurchase unsold products.

In a pyramid scheme, new investors must pay a fee to sell the products or services, as well as to recruit others into the pyramid for rewards unrelated to product sales or services.

Legitimate multi-level marketing companies, on the other hand, base success on product and service quality, and the hard work involved in selling the products or services, making recruitment of new investors secondary.

The only people who make money in a pyramid scheme are those on the top of the pyramid, while pyramid schemes are doomed to fail because they rely on recruiting more and more investors.

Legitimate multi-level marketing companies can be around for a long time because they involve solid products or services, protecting participants from huge losses.

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People invest in pyramid schemes for various reasons, but ultimately, it's a recipe for disaster. One of the main reasons is greed, where individuals know they're participating in an illegal activity but hope to make a profit before the scheme collapses.

Pyramid promoters often target closely knit groups, such as religious organizations or college students, to increase pressure to participate. They give these schemes attractive names like "investment clubs" or "gift programs" to make them sound legitimate.

These clubs or programs are presented with assurances that they're perfectly legal, approved by the Internal Revenue Service or a Certified Public Accountant. Some even explicitly state that they're not a pyramid scheme.

Participants are required to characterize their investments as "unconditional gifts" by signing waivers, but the truth is that they expect others to do the same. This is not an unconditional gift, and it's a key characteristic of a pyramid scheme.

It's only when the products or services become unsaleable and the promoters refuse to repurchase them that people realize they've been scammed.

If a multi-level marketing company emphasizes reliable products or services, it's likely not a pyramid scheme. A pyramid scheme uses products or services to disguise its true intention: collecting money from investors on the bottom levels to pay those higher up.

In a pyramid scheme, new investors are often required to pay a fee for the right to sell products or services, as well as for the right to recruit others. This is a red flag. Legitimate multi-level marketing companies, on the other hand, will buy back unsold merchandise, although often at a discount from the original price.

To avoid being defrauded, it's essential to gather all information about the company, its officers, and its products or services. Get written copies of the company's marketing plan, sales literature, contracts, and prospectus (a legal document that gives prospective investors information about a company). If you don't understand it, get someone independent of the company to explain it to you.

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Find out if there is a demand for the product or service, and if there are similar products or services on the market. If the promoters seem to be making most of their money by selling distributorships or large start-up inventories to new recruits, stay away. The start-up cost should not be substantial, and you should be wary of promises of quick, easy, and unreasonably high profits.

Here are some key questions to ask before investing in an MLM company:

If you answer "yes" to any of the following, it may be a pyramid scheme:

The dangers of MLMs are real. They often use predatory, cult-like tactics that target people who are financially, emotionally, and mentally vulnerable.

The Federal Trade Commission (FTC) provides consumer protection and guidance around predatory business activities. You can check out their guidance on the FTC website.

BurnLounge is an example of an MLM that has been known to use these tactics.

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Some companies have found success with multi-level marketing products, including Boxycharm, Glossybox, FabFitFun, and Ipsy. These companies partner with well-known brands like Avon, Mary Kay, and Monat to offer a range of products in their subscription boxes.

However, not all MLMs are created equal, and some have been criticized for their business practices.

Boxycharm's website is operational, but their store is not working and all products are "Out of Stock". This is a red flag for potential customers.

On the other hand, some MLMs have been shut down due to their questionable business models. Spa for the home, for example, is out of business and has been labeled as a "Product-Based Pyramid Scheme" by the FTC.

It's worth noting that some MLMs have been able to avoid this fate by offering legitimate products and services. However, it's still essential to do your research and approach these opportunities with caution.

Here are some examples of MLMs that have been criticized for their business practices: