In August 2013, I asked Is Vemma a Scam? Two years later, in September 2015, the FTC seemed to answer me by halting Vemma as a pyramid scheme.
Dear FTC, please add to my cover letter that I have a history of recognizing scams two years before you do. (I’m joking.)
A little while ago, someone left a comment on my website saying that Vemma was back up and running. I was quite surprised. How can this be? The FTC shut them down, right?
Before I get to how they came back and the ramifications of that, allow me to give a very, very brief introduction into MLMs/pyramid schemes.
The first question people ask is, “What is the difference between the two?” Unfortunately, even the NY Times isn’t quite sure. They correctly point out that it is impossible for a consumer or potential entrepreneur to know because they don’t have access to the company’s bookkeeping to know the difference.
It is generally considered a sign of a legitimate business if they have more sales volume of products to people outside the business (the public) than to people in their recruited hierarchy/team/pyramid/downline (these are different terms representing the different connotations when referring to the exact same thing).
This comes from these FTC guidelines:
“Not all multilevel marketing plans are legitimate. If the money you make is based on your sales to the public, it may be a legitimate multilevel marketing plan. If the money you make is based on the number of people you recruit and your sales to them, it’s not. It’s a pyramid scheme. Pyramid schemes are illegal, and the vast majority of participants lose money.”
In short, selling to customers is good… building a group beneath you is bad. I find it strange that the FTC seems to be okay with the bad as long as it is balanced with good. To me, it’s almost like saying, “Well he robbed a bank and that’s bad, but he gave the money to charity, so we are okay with it.”
The FTC guidelines are interesting in and of themselves as they put the burden on the consumer/entrepreneur in determining if a company is an illegal pyramid scheme. The next time you get a speeding ticket, try using that logic with the police officer and see how far it gets you. Here’s a helpful start:
“Officer, I saw the guidelines posted on the speed limits, but I made a judgment call that they might not be accurate and proceeded to drive at a speed that I found most beneficial to me.”
The point is, “When did it become an individual citizen’s call on whether an activity is legal or not.”
It is no wonder that NY Times is confused. I don’t think I’ve seen a similar situation in any other crime/industry.
How’d Vemma Come Back?
Vemma, the FTC, and the courts got together to try to work out a system that would allow Vemma to run a legitimate MLM rather than pyramid scheme.
Vemma and the FTC went back and forth quite a bit as noted in the conclusion of BehindMLM’s analysis. The FTC wanted sales volume from recruited volume paid only if a sales person made 51% of their money through sales to people who are not part of that recruitment hierarchy. In short, they appear to be enforcing their guidelines and making sure that sales people are selling product, not a pyramid scheme of selling a business opportunity.
Vemma tried to work around it, but the regulator and the court appear to have firm until Vemma agreed to what has now become known as the “51% rule.”
Specifically Vemma’s Compensation Plan states, “You will only be paid on the volume in your organization if your organization’s sales to Customers are at least 51% of the total sales for your entire organization.”
This this safeguard (and probably quite a few others) Vemma was allowed to resume business.
The “51% Rule” Changes the Game
This 51% Rule is a game changer for the MLM/pyramid scheme industry. There is a good Seeking Alpha article, Did The FTC Just Shape The Future Of Multi-Level Marketing?, that recognizes this.
The top people at every MLM that I’ve ever looked at make huge amounts of money, anywhere from 500K to multiple millions a year. I’ve always contended that these people are clearly running pyramid schemes according to the FTC guidelines, because some 99+% of their money comes from the recruitment hierarchy, not selling product to the general public.
As I understand it, these people can’t exist in Vemma anymore. Their income would be cut from hundreds of thousands of dollars to hundreds of dollars. These top earning people often switch MLMs to make more money. They aren’t going to stick around with 99+% of their income being taken away. They’ll move to Jeunesse, Nerium, or It Works and bring their pyramid/downlines with them.
As I covered in the article, Is Every MLM a Scam?, MLM companies fight for distributors. There are many lawsuits of a MLM company poaching distributors of another MLM company.
It looks to me that this rule is going to really hurt Vemma’s ability to compete with those MLMs. There was speculation in the Seeking Alpha article that they only agreed to this so that they can sell off their existing inventory. This makes sense, especially with Vemma’s “Thank You” Pricing and marketing campaign.
From what I’ve read in comments on some MLM sites, the industry is pretty up in arms about this. A pro-MLM author, Scott Smith, on MLM.com even proposes a workaround to subvert the FTC:
“If the ‘51% rule’ becomes an industry-wide practice like the 70% rule, companies may register each new member as a customer, and then transition them to distributors only when they begin to recruit. From an operational perspective, this isn’t difficult to implement. But it requires a mindset that may be difficult for many distributors to adopt. It adds another step in the recruiting process. It slows things down in the process of building an MLM business.
It is especially problematic to advocate this kind of policy now that MLM has become an e-commerce industry. Before the Internet, distribution happened face-to-face and the recruitment side of a distributor’s business occured naturally over time. Today’s distributors often allow prospects to self-register through an online shopping experience and perhaps never or rarely interact face-to-face with downline distributors. Technology has made recruiting a smooth, fast, streamlined process; adding the 51% hurdle could slow the momentum that technology has fueled.”
I suspect that if companies try to subvert the FTC by playing games it’s only going to lead to more lawsuits. I don’t imagine the courts will look favorably on such tactics. They would become low-lying fruit for the court to show that a company is using deceptive practices to subvert regulation. Also, the people at the top would have to have a lot of customers who want to remain customers to offset 500K or more of income in their downline/pyramid.
The second part of the quote shows how FUBAR the “industry” of MLM has become in recent years with the internet. Recruiting people is as easy as allowing a self-registering person to shop online? People never meeting with their direct downline? In the past, MLM got a pass partly because the people in the upline were supposed to train their downline to be good salespeople. This “streamlined process” eliminates that. A legitimate, non-pyramid scheme company, could do the same thing but put official training materials online and offer a straight commission program. That would be clearly better for everyone involved.
(Sorry, but I couldn’t resist that second part.)
The last point I want to emphasize here is that the 51% rule is really nothing new. It’s been in the FTC guidelines mentioned above for years and years. This strict enforcement of it specific to Vemma is new, but any legitimate MLM would appear to have needed to comply with it for years now (whether strictly enforced or not).
The End of MLM/Pyramid Schemes
Perhaps the best quote from Scott Smith of MLM.com was this:
“And who is going to be the first to implement a 51% rule? To illustrate the problem this creates, let’s say I am a company who trusts the FTC to mean what they say and I bravely comply with the 51% rule as if it were law. I will be destroyed by my competitors. Unless every company is doing the same thing no one will want to work for the one company that has implemented the 51% rule.”
Isn’t it an interesting choice of words, “a company who trusts the FTC to mean what they say”? It’s seems like he’s saying that companies have a reason to mistrust the FTC. If you are running a legit company, you should have no problems with the FTC. If you are running a shady pyramid scheme and looking to subvert their regulation, perhaps you develop a mistrust of the FTC.
This quote illustrates the pickle that MLM companies now find themselves in, which is why I think it will be the beginning of the end of MLM/pyramid scheme scams.
Any legitimate company would jump at the chance to show themselves legitimate and volunteer to implement the 51% rule. It’s free insurance that makes the FTC extremely unlike to bring a pyramid scheme suit against you. There’s no reason in the world why they wouldn’t take the opportunity and thank their lucky stars that they have it.
If a company doesn’t volunteer to comply with this 51% rule and strictly enforce it, one is left to conclude that they aren’t a legitimate company. If the police ask you to come out with hands up and you didn’t do anything wrong, you comply with the innocuous request. If you fight it, attempt to subvert it, or fail to comply, you are going to be assumed to be guilty.
MLM companies find themselves in an interesting pickle now. They can comply with the 51% rule to show their innocence and risk being destroyed by competitors. Or they can fight/ignore the 51% rule which leads to the obvious conclusion that they aren’t legitimate.
I have great confidence that MLM companies aren’t rushing to declare their legitimacy by strictly complying with the 51% rule. If they aren’t going to declare themselves legitimate, consumers/entrepreneurs should run away as fast as they can.
This also puts the Direct Selling Association (DSA) in a pickle. The DSA is an organization of MLM companies that lobbies congress and attempts to self-regulate the MLM space. If the DSA doesn’t require all its members to strictly comply with the 51% rule, it becomes clear that they are unfit for self-regulation.
It looks to me like MLM, as it exists today, is a house of cards, and the main support just got knocked out from underneath them.
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