LuLaRich' and pyramid schemes: 4 ways to tell if the company is a scam - TODAY

A gripping new documentary miniseries is bringing attention to multilevel marketing platforms.

"LuLaRich," available on Amazon Prime, chronicles the story of LuLaRoe, a clothing empire famous for its "buttery-soft leggings," but accused of being a pyramid scheme and using predatory practices to make money. The company has been the subject of multiple lawsuits, including a suit in Washington state that was settled for $4.75 million in February.

The four-episode series, which debuted in early September, highlighted the predatory practices of multilevel marketing schemes, also known as MLMs. While MLMs are legal in the United States and recognizable companies like HerbaLife and Young Living use the business structure, experts say they often closely resemble pyramid schemes and victimize sellers.

What is a multilevel marketing scheme?

The Federal Trade Commission defines MLMs as "businesses that involve selling products to family and friends, and recruiting other people to do the same." MLMs are also known as direct marketing or network marketing businesses.

The FTC also notes that "some MLMs are illegal pyramid schemes." The experts we spoke with were harsher on the business model.

"If you're in an MLM, it's a scam," said Robert FitzPatrick, an author of several books about multilevel marketing and president of Pyramid Scheme Alert, the first international association aimed at preventing pyramid scheme-related fraud. "... Almost everybody is going to lose. But the people who are at the top of the platform will make a lot of money."

FitzPatrick said that there are four hallmarks to a multilevel marketing scheme:

1. "It's an endless chain:" FitzPatrick said that the most obvious sign of an MLM is that sellers are pressured to recruit other sellers, from whom they will then make money. This is typically described as a "downline" — the recruiter will get a portion of the sale that the person they recruited sells, and the chain continues.
2. "Just pay:" FitzPatrick said that another hallmark of a multilevel marketing scheme is having to buy merchandise upfront or pay a large fee to join the company. This fee is typically described as a "starter fee" or "starter pack" of merchandise. Since sellers have to purchase the clothing before they can sell it, it can be financially risky. MLMs also emphasize meeting a certain sales goal each month, and will often recommend sellers buy enough to reach that minimum if they don't have enough sales.
3. The third warning sign is a "recruiting mandate," which ties closely to the "endless chain" concern: FitzPatrick said that multilevel marketing schemes will focus on constantly recruiting more people, which makes it difficult to have a sustainable business.
4. The fourth hallmark, FitzPatrick said, is how and what a person gets paid. The vast majority of people lose money. Only about one-quarter of people involved in MLMs make any money, and that money can be quickly eaten up by the need to purchase more merchandise.

Dr. William Keep, a professor at the College of New Jersey who is regarded as an expert on multilevel marketing, said that another struggle is the MLM industry's unwillingness to be transparent. He said that "LuLaRich" offered an unusual glimpse into the inner workings of such a company, and said that the opaqueness of the industry makes it difficult to know "how many multilevel marketing platforms are operating like pyramid schemes."

"We know for sure that using that model, it's very easy to operate an illegal pyramid scheme ... The key warning sign is that, in order to succeed, you are asked to recruit others who will then be asked to recruit others," Keep said.

Keep added that that emphasis on recruitment, which FitzPatrick listed as one of the hallmarks of a multilevel marketing platform, is "against all competitive models" typically found in business, since recruited customers will no longer purchase product from a seller.

He also addressed the financial aspect of multilevel marketing platforms, referencing LuLaRoe in particular. As part of their settlement with Washington state, the company revealed its median earnings for sellers. Typically, MLMs release the mean or average earnings, which can be skewed by high earners with large downlines.

"The median earnings were zero," Keep said. "We're talking about people being financially negative (after expenses)."

Myths about MLMs, debunked

"If they were illegal, the government would shut them down."

Keep said that many people defending MLMs from accusations of being pyramid schemes will turn to this phrase, but it's "not true," referencing the company AdvoCare, an MLM that operated for decades and had national spokespeople like Drew Brees. In 2018, after more than 26 years in operation, the group was finally prosecuted by the FTC — but Keep said it took a long time to get there. AdvoCare still exists, but operates with a different structure now.

"If they have a product, they can't be a pyramid scheme."

Keep pointed out that for many organizations, the products sold — like LuLaRoe's "buttery-soft leggings" — are just "vehicles to move money."

"Naturally, you want a product to be viable, because it seems more suspicious if not," Keep said, but said that for many companies, the product is secondary to the model of recruitment and developing downlines.

FitzPatrick said that other things, like being traded on stock exchanges, can also give MLMs a sheen of legitimacy.

"(People say) surely that can't be a pyramid scheme, celebrating in plain sight," FitzPatrick said. But being traded on the stock exchange doesn't mean it's a fair business.

"All businesses have start-up costs."

One of the hallmarks of MLMs, as explained by FitzPatrick, is constantly buying product, and that typically starts with a "starter fee" or by buying a "starter pack" of merchandise from the company. Many MLMs compare these fees to the costs associated with building an independent business, but they're extremely different, especially since MLM products are not unique and are sold by other sellers on the platform, Keep said.

"There's a thing that the industry is really good at doing, and that's taking statements and presenting them as if they're individual things to stand on their own," Keep said. "Many businesses do not make money right away, that's true. Many businesses fail, that's true. But here the business model, if you want to call it a model, is that the vast majority of people fail, and their failure generates profits for those above them (in the upline)."

Related: