Tips to Avoid Schemes Disguised as Multi-Level Marketing Companies

By Timothy Moore · October 18, 2023 · 8 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Tips to Avoid Schemes Disguised as Multi-Level Marketing Companies

Multi-level marketing businesses— also called direct sales, direct marketing, or network marketing — are legitimate enterprises that involve selling products or services to a network of peers (i.e., friends and family) and recruiting more salespeople.

The problem? According to the Federal Trade Commission (FTC), many illegal pyramid schemes disguise themselves as legal multi-level marketing (MLM) companies. Even legal MLMs can be bad news; most people make little or no money with MLMs, and some even lose money.

Read on to learn:

•   What’s an MLM?

•   What are the differences between MLMs and pyramid schemes?

•   How can you avoid multi-level marketing companies?

Get up to $300 when you bank with SoFi.

Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!

What Is a Multi-Level Marketing (MLM) Company?

A multi-level marketing business, or MLM for short, is a legitimate business that sells products and services through independent distributors. These companies rely on such distributors to sell to networks of peers, typically friends and families. The distributors, often called “participants” and “contractors,” must also recruit new distributors for the program.

The companies are found in a variety of categories. They might be selling supplements, personal-care products, kitchen utensils, or any other number of items.

Recommended: Common Credit Card Scams

How Do Multi-Level Marketing Companies Work?

What is an MLM company, and how does it operate? In a multi-level marketing business, distributors must first buy the products wholesale from the company. They then make commissions off the products that they sell at retail prices.

Distributors also earn a commission from their recruits’ sales, which incentivizes distributors to recruit more people into the business. Those at the top of the company, with multiple levels of distributors beneath them, thus earn the most money without even needing to purchase more products to sell.

Multi-Level Marketing vs. Pyramid Schemes: What’s the Difference?

Though sometimes questionable, multi-level marketing programs are legal. Pyramid schemes, however, are illegal types of money scams. Unfortunately, many pyramid schemes disguise themselves as legitimate MLMs. Here are key differences:

•   Pyramid schemes are more focused on recruiting than actually selling the products. While MLMs do ask you to recruit more distributors, the focus is on sales.

•   Pyramid schemes may also require distributors to buy more products at regular intervals, even if they have not sold all the products they already have. Sometimes, in a pyramid scheme, you have to buy more products just to get paid or earn a bonus. This is a major red flag.

In the end, most people who are swindled into pyramid schemes run out of money, are stuck with products that they can’t sell, and quit — meaning they lose everything they invested in the business.

Recommended: Are You Bad With Money? Here’s How to Get Better

Real-Life Examples of Multi-Level Marketing Companies

Some products marketed and sold through network marketing companies are from legitimate MLM businesses — and you can feel comfortable purchasing them. In other cases, recognizable products can emerge from pyramid schemes.

Here are some real-life examples of legal, established MLMs. You may be surprised to learn that what is an MLM can be a familiar and trusted brand:

•   Amway

•   Avon

•   Herbalife

•   Vorwerk

•   Mary Kay

•   Infinitus

•   Perfect

•   Quanjian

•   Natura

•   Tupperware

•   Nu Skin

•   Primerica.

Recommended: 9 High-Paying Jobs That Don’t Require a Degree

Why Is Multi-Level Marketing Legal?

Multi-level marketing businesses must adhere to strict FTC guidelines to be considered legal. The FTC regularly goes after suspicious MLM companies that may actually be pyramid schemes.

Though sometimes seemingly predatory, MLM is just a form of direct sales. When adhering to FTC guidelines, these businesses aren’t breaking any laws.

Recommended: What’s a Pump-and-Dump Scheme?

What Is the 70% Rule?

Though not technically a law, the 70% rule is a common term in MLM discussions. It arose in a 1979 case against Amway.

In analyzing the business structure of Amway, the FTC determined that, because Amway required distributors to sell at least 70% of the products they bought in a given month to earn a bonus, Amway was attempting to operate as a legitimate MLM. Their business model involved profited from sales, not shady recruiting tactics.

Now, the 70% rule is a loose term that means an MLM is focused on sales, rather than requiring distributors to buy more products or recruit more people to earn bonuses. The trouble with this rule is that it is difficult to enforce: MLMs typically trust their distributors to tell the truth about how much product they’ve sold but cannot always verify the numbers.

Are the Products That MLMs Sell Legitimate?

The products and services that MLMs and even pyramid schemes sell can be completely legitimate. Just think of that trusty Tupperware in your kitchen cabinet or your favorite lipstick from Mary Kay.

But even if a product is good, the distributor requirements of a legitimate MLM or shady pyramid scheme can still cause the seller to lose money.

Recommended: A Guide to Credit Card Protection

Can You Create Financial Freedom by Joining an MLM?

Multi-level marketing companies require a lot of entrepreneurial hustle from distributors to make money. As contracted sellers, distributors don’t earn a salary but instead make commissions.

While someone with a true sales spirit may make some money in an MLM, most do not make enough money to achieve any kind of financial freedom without another source of income. In fact, the FTC says some people even lose money from legitimate MLMs.

Pyramid schemes are worse, having left some people in economic ruin.

Tips for Recognizing Predatory MLMs and Pyramid Schemes

While MLMs are legitimate, they may not be worth the effort and could also cause you to lose money. Illegal pyramid schemes, however, are usually designed to hurt the low-level distributor.

So how can you spot a predatory MLM or pyramid scheme? Here are a few warning signs:

•   Hyperbolic claims of excess income: If a brand promoter is promising outlandish amounts of income — even saying you can quit your day job and retire early — that’s typically a red flag.

•   “Act fast” pressure: You should be able to think about any financial decision and be given the time to talk it over with friends and family. Brand promoters of pyramid schemes and predatory MLMs may use high-pressure tactics, like telling you that you must act now or you’ll lose out on the opportunity.

•   An emphasis on recruiting: In a true MLM where you at least have the potential to earn money, the emphasis should be on sales. If during initial conversations with a promoter, the emphasis is on recruiting other members, this is likely an indicator of a pyramid scheme.

Recommended: How to Verify a Check

Tips for Avoiding Predatory MLMs and Pyramid Schemes

The first step to avoiding a shady MLM or full-on pyramid scheme and protecting your finances is recognizing them when you see them.

Here’s what you can distinguish what are MLMs from pyramid schemes and avoid the latter:

•   Researching the company: Take the time to conduct research online. The FTC recommends googling the name of the company with terms like “scam” or “complaint” and then analyzing the results. The FTC even suggests reaching out to your state attorney general to inquire about complaints for a specific company. Uncovering evidence of lawsuits during your research is often a tell-tale sign.

•   Analyzing the products: Legitimate MLMs can sell good products. Pyramid schemes might even have products that you recognize. But if any company has poor-quality products that they expect you to sell, there’s a good chance it’s a pyramid scheme. Watch for products that are priced too high, claim to have “miracle” ingredients, or “guarantee” results.

•   Asking good questions: If the promoter is unwilling to answer very basic questions, like how refunds work or what happens if you can’t sell the product, they are likely hiding something.

•   Not making decisions in a vacuum: It’s a good idea to discuss all major financial and business decisions with a trusted friend or family member. If you have paperwork for an MLM that you’re unsure about, you can even have a personal accountant or lawyer review it before you sign.

Recommended: Jobs That Pay for Your College Degree

The Takeaway

Multi-level marketing companies are legitimate and legal direct-sales businesses, but they rarely enable a distributor to make good money; some distributors may even lose money. Pyramid schemes are typically disguised as MLMs and can lead to financial ruin. Such schemes are illegal. In general, it’s a good idea to avoid any kind of MLM company if you are unsure of their trustworthiness.

Looking for other ways to grow your finances? Open an online banking account with SoFi to take advantage of our super competitive APY and the fact that we don’t charge account fees, which can help your money grow faster.

Better banking is here with SoFi, NerdWallet’s 2024 winner for Best Checking Account Overall. Enjoy up to 4.60% APY on SoFi Checking and Savings.


Is it legal to join an MLM?

Yes, it is legal to join an MLM. However, very few people earn enough money from multi-level marketing companies to make them worth the effort. In fact, some people lose money in MLMs.

What makes an MLM illegal?

MLMs are legal, but pyramid schemes are not. Pyramid schemes often disguise themselves as legitimate MLMs. However, with pyramid schemes, the emphasis is on recruiting new members and forcing distributors to buy more products, rather than focusing on empowering distributors to successfully sell to customers.

Are MLMs the same as pyramid schemes?

No, MLMs are not the same as pyramid schemes, but pyramid schemes often disguise themselves as MLMs. Multi-level marketing companies are legitimate businesses that require distributors to buy products and earn commissions by selling them to a network of peers. Pyramid schemes are more focused on recruiting new distributors and forcing them to buy products than empowering distributors to sell the products.

Photo credit: iStock/Makhbubakhon Ismatova

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at


All your finances.
All in one app.

SoFi QR code, Download now, scan this with your phone’s camera

All your finances.
All in one app.

App Store rating

SoFi iOS App, Download on the App Store
SoFi Android App, Get it on Google Play

TLS 1.2 Encrypted
Equal Housing Lender