Know before you join
Direct sales vs pyramid schemes. Follow the money.
Updated Oct. 2, 2026 · 6 minute read
The one question that matters
Who is the customer?
Pyramid schemes are scams. They can look remarkably like legitimate MLM business opportunities.
The short version
- A legitimate company pays you for product sold to real customers.
- A pyramid pays mainly for recruiting: sign-up fees and recruits’ own purchases.
- Having real, even good, products does not make a company legitimate on its own.
- Most people in even legitimate MLMs earn little. Read the earnings data.
The legal test
How regulators draw the line.
In the United States, the Federal Trade Commission has used the same basic test since its 1975 case against Koscot Interplanetary. A plan is a pyramid when participants pay money for the right to sell a product and for the right to earn rewards for recruiting others that are unrelated to sales to the ultimate users.
The FTC’s current business guidance looks at how the plan works in practice, not what the paperwork says. Rewards that depend on recruiting, or purchases made mainly to qualify for a rank or bonus, count against a company even when it sells real products.
Enforcement has been expensive for the companies involved. In July 2016 Herbalife agreed to pay $200 million and restructure its US business so participants are rewarded for retail sales; the settlement did not label it a pyramid scheme. In October 2019 AdvoCare agreed to pay $150 million and stop multilevel marketing after the FTC alleged it operated an illegal pyramid scheme.
“This settlement will require Herbalife to fundamentally restructure its business so that participants are rewarded for what they sell, not how many people they recruit.” FTC Chairwoman Edith Ramirez, July 15, 2016
An MLM can sell real, even high-quality, products or services and still be a pyramid scheme.
Side by side
Legitimate direct sales vs a pyramid scheme.
| Feature | Legitimate direct sales | Pyramid scheme |
|---|---|---|
| Where the money comes from | Customers outside the sales force buying products they want | New recruits paying to join and buying to qualify |
| Cost to join | A starter kit worth roughly what you pay, often optional or refundable | Large fees or bundles with little product value |
| Inventory | Buy what you can sell or use; many companies ship direct | Pressure to stock up, often to hit a rank |
| What you're paid on | Product sold to real customers | Recruiting, sign-up fees and recruits' own purchases |
| Unsold product | Buyback policy for resaleable inventory | No buyback, or one that's hard to use |
| Earnings talk | Typical results disclosed; top earners labelled as exceptional | Lifestyle promises, cars, ‘financial freedom’ |
| Recruiting | Optional; you can earn by selling alone | Required to make money at all |
Red flags
Six warning signs to walk away from.
- Flag 1
Extravagant earnings promises
Talk of replacing your salary, luxury cars or ‘financial freedom’ in months, with no typical-earnings figures to back it up.
- Flag 2
Recruiting matters more than selling
Your pay depends mostly on how many people you bring in, not how much product reaches real customers.
- Flag 3
Inventory loading
Being pushed to buy more than you can sell or use, especially to qualify for a rank, bonus or ‘active’ status.
- Flag 4
High-pressure tactics
‘Sign up tonight’, ‘spots are limited’, or being told to borrow or use credit cards to get started.
- Flag 5
Vague or missing products
The product is overpriced against store equivalents, hard to explain, or nobody outside the sales force seems to buy it.
- Flag 6
No income disclosure
The company can't or won't show what its typical participant earned last year.
Any company that tries to pressure you to join is one to avoid.
Before you sign
Ask the person recruiting you these questions.
- 1How much money did you make last year, after expenses?
- 2Do you need recruits to make money?
- 3What share of your income came from selling product, and what share from recruiting?
- 4What does it cost to start, and what does it cost each month to stay active?
- 5Will the company buy back unsold inventory, and on what terms?
- 6Can I see the company's most recent income disclosure statement?
Check the company here first
Every company profile on Direct Sales Aid shows the startup cost, commission range and reviews from real customers and consultants. If a company isn’t in our directory, or we’ve marked it as no longer in business, that’s worth knowing too.
Search the directory →Considering a company that pays only on your own sales? See Affiliate vs Direct Sales.
Quotations are from the FTC’s consumer guidance (updated July 2022) and Business Guidance Concerning Multi-Level Marketing(2024). Settlement figures are from the FTC’s announcements of the Herbalife (July 2016) and AdvoCare (Oct. 2019) cases. This page is general information, not legal advice.
Research a company before you join.
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