Legality and Legitimacy

MLM businesses operate in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like "affiliate marketing" or "home-based business franchising". However, many pyramid schemes try to present themselves as legitimate MLM businesses.

The FTC states "Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes. Why is pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people-except perhaps those at the very top of the pyramid-end up empty-handed."

In a 2004 United States Federal Trade Commistion (FTC) Staff Advisory letter to the dierect selling association 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. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.

The FTC warns "Not all multilevel marketing plans are legitimate. Some are pyramid schemes. It's best not to get involved in plans where the money you make is based primarily on the number of distributors you recruit and your sales to them, rather than on your sales to people outside the plan who intend to use the products."and states that research is your best tool and gives eight steps to follow:

• 1) Find — and study — the company’s track record.
• 2) Learn about the product
• 3) Ask questions
• 4) Understand any restrictions
• 5) Talk to other distributors (beware shills)
• 6) Consider using a friend or adviser as a neutral sounding board or for a gut check.
• 7) Take your time.
• 8) Think about whether this plan suits your talents and goals.

However there are people who hold that all MLMs are nothing more than pyramid schemes even if they are legal rendering the whole issue of a particular MLM being legal moot.