Multilevel Marketing and Income Disclosures

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Overview:

Multilevel marketing is targeted by the Federal Trade Commission as influencers fail to disclose real earnings from their enterprise. Could consumer surveys be used to help the people at the bottom of a pyramid scheme?  

What Is Multilevel Marketing?  

Multilevel marketing (MLM) is a business plan that has three or more levels of participants selling products. This is not to be confused with pyramid schemes, in which participants make profits by recruiting others to be salespeople rather than by selling products. In MLM, participants are compensated through two different streams of revenue: a percentage of the product sold and a percentage of the wholesale purchases made by other sellers who the participant recruited, often called downline distributors.  

Participants in MLM organizations recruit downline distributors in a variety of ways, including promoting the product and incentivizing distribution. A way to incentivize distribution is to advertise how much money distributors can earn. But how individuals disclose their earnings, and the use or misuse of funds, have been criticized, including in documentaries like the hit LulaRich.  

FTC MLM Findings  

The U.S. Federal Trade Commission has been critical of MLM disclosures too. In September of 2024, the FTC issued a report about its investigation of 70 MLM organizations and their income disclosure statements. This investigation was inspired by responses to an Advance Notice of Proposed Rulemaking the FTC issued in 2022. The notice requested public comment on whether the FTC should regulate earnings claims, and the majority of comments the agency received in response was related to MLMs. Since one half of the revenue stream for participants in MLM is through recruitment earnings, and many MLMs recruit using marketing that discloses earnings, the report centered around these communications.  

Some MLM organizations offer disclosures of participants’ earnings, generally in a document breaking down earnings for different categories of person participating in the MLM. Commenters on the FTC’s rulemaking notice claimed that the reports are inadequate, incomplete, or misleading, so FTC staff studied 70 publicly available earnings disclosures that included at least some data on dollar amounts. They found that: 

  1. Most income disclosures did not include data from participants who made little to no income.  
  1. No income disclosure accurately disclosed all business expenses incurred by participants.  
  1. Most disclosure statements emphasized income data from the top earners, a relatively small number of participants.  
  1. Many statements present data in an ambiguous or potentially confusing way.  
  1. Many presented important information in an inconspicuous way.  
  1. Several made claims with no clear basis. 
  1. A close analysis of the data showed that most participants in the MLMs had little or no reported income. 

These findings are not connected to any rule or law, but could be a precursor to a future FTC rulemaking. If so, MLMs could face costly fines or legal action for recruiting using disclosure statements found to be misleading or deceptive.  

Consumer Surveys and False and Misleading Communications  

According to the Direct Selling Association and the FTC Report, over 14.6 million people are involved in MLM sales in the United States. If an MLM is sued for allegedly misleading statements in its marketing or recruiting statements, a consumer survey could provide valuable evidence to either side. For example, a consumer survey could measure how consumers interpret the disclosure statements; what they took away from the statements; and whether certain claims were material to participants’ decisions to invest in the MLMs. 

MLMs must ensure that their communications withstand regulatory scrutiny and avoid violating false advertising laws. If you are looking for reliable consumer survey research about any contested aspect of a marketing communication, contact MMR Strategy Group.