MLM pyramid schemes

What it is

Someone you already know — a friend, a former classmate, a face from your social media feed — tells you about a “business opportunity.” There is a real product involved: trading education, aloe vera supplements, skincare. You can sell it. You can also earn money by bringing other people in to sell it too, and the pitch usually spends far more time on the second part than the first.

That second part is where the law draws its line. The FTC’s test for an illegal pyramid scheme dates to its 1975 ruling in In re Koscot Interplanetary, Inc.: a plan is a pyramid when participants pay for both the right to sell a product and the right to earn rewards for recruiting other participants that are unrelated to selling that product to actual retail customers. There is no fixed percentage of retail sales that creates a legal safe harbour — regulators look at how the company operates in practice, not just what its policy manual says.

Three FTC cases resolved in 2026 show the pattern at different scales: a $1.2 billion trading-education MLM, a long-established wellness products company where 77% of distributors earned nothing, and an individual top recruiter promising “no less than six figures” to people who, on her own companies’ data, overwhelmingly did not get it.

How it actually works

1. The recruitment pitch

   Social media videos, livestreams and college-campus outreach show luxury cars, trips and oversized cheques, presented as proof the opportunity works.

2. A specific, unsubstantiated number

   “No less than six figures.” “Retire in your twenties.” “We will be paying millions in bonuses next year.” A concrete figure is more persuasive than a vague promise of “extra income.”

3. The buy-in

   A starter kit, a monthly training subscription, or a minimum product purchase — around $300 to $400 a month in the documented cases here — paid before any sale to an outside customer has happened.

   Where it could have stopped

   Ask, in writing, what share of the company’s total payouts come from retail sales to people outside the business, versus from other participants’ fees and purchases. A plan that pays mainly for recruiting rather than for product sold to real customers is an illegal pyramid under the FTC’s Koscot test, whatever the compensation plan document calls it.

4. Recruited as the product

   The new distributor’s own signup fee and ongoing payments are now revenue for whoever recruited them — the transaction the business actually runs on, whatever the marketing describes.

5. The purchase treadmill

   Staying “active” and eligible for commissions typically requires a recurring payment or inventory purchase, independent of whether any of it is ever sold to someone outside the network.

6. Most people stop paying

   The FTC’s IM Mastery Academy complaint cites internal data showing roughly 60% of customers stopped paying within a month and about 90% stopped within six months. Dropout is the modal outcome.

7. The top of the pyramid profits

   The FTC’s Forever Living complaint alleges fewer than 7% of distributors earned anything at all from the people they recruited — concentrated among the earliest joiners, who are the ones shown in the recruiting videos.

8. Enforcement, years later

   A regulator sues, the company or individual settles without admitting wrongdoing, and a fraction of what was taken is ordered surrendered — permanent bans on future earnings claims, not usually prison.

Why it works

The product is real, so the scepticism goes to the wrong place. Asking “does this product exist and work?” returns the answer yes for a genuine skincare line or a real trading course. The actual question — “does the compensation plan pay for sales or for recruiting?” — is much harder for an outsider to evaluate, and the marketing never poses it.

A trusted recruiter is doing the persuading. Unlike a cold-call scam, the pitch usually comes from someone already inside the recruit’s own social network — a friend, a family member, a former colleague — which does real work that a stranger’s pitch could not.

A specific number sounds researched. “No less than six figures” or “retire in your twenties” reads as a claim someone checked, not a guess — even when, as in the Wellington case, the company’s own income-disclosure data shows fewer than 1% of participants ever reach it.

Early joiners really are paid, and they are the ones you see. The people featured in recruiting videos and testimonials are disproportionately the earliest participants, for whom the maths has worked so far — because they are recruiting from a much larger pool of people below them who have not yet discovered the same maths does not work twice.

The buy-in is framed as a business investment, not a purchase. Calling a $300–400 payment a “business opportunity” cost, rather than a product purchase, reframes an ordinary consumer transaction as something the buyer is supposed to expect risk from — softening scrutiny that a straightforward sales pitch would draw.

Where it comes from

Domestic, corporate and operating in the open — not hidden, and not new.

The legal framework is fifty years old. The FTC’s Koscot test has applied since 1975, which is itself informative: this is not an emerging fraud typology that regulators are still learning to recognise, it is a well-understood pattern that keeps reappearing under new company names and new products.

Three enforcement actions in 2026 alone, at very different scales. IM Mastery Academy/IYOVIA (settled May 2026, $795.8 million judgment); Forever Living (ordered April 2026, no monetary judgment disclosed in the announcement, focused on a permanent claims prohibition); Stormy Wellington, an individual recruiter across two separate companies (settled April 2026).

Enforcement reaches individuals, not only company founders. The Wellington case shows the FTC will pursue a high-level participant separately from the company itself — being a recruiter rather than an owner is not a shield.

These are US companies, publicly operating, some internationally distributed. Forever Living sells a real, physical product through an established retail and distributor network; IM Mastery Academy ran paid training programmes with real instructors. Neither is a shell built to disappear — which is part of why the FTC’s remedy in two of the three cases here is a permanent claims prohibition that leaves the underlying business operating, rather than a shutdown.

Civil enforcement, not criminal prosecution, in every case here. The FTC pursues these operations under the FTC Act’s unfair-and-deceptive-practices authority — fines, asset surrender and bans on future conduct, not prison sentences — which is one reason the same underlying compensation-plan structure keeps recurring under different brand names.

Real cases

Red flags

• Recruiting is the focus, not the product. If the pitch is about the income opportunity before it is about who would actually buy the product, that is the FTC’s own definition of the problem.
• A specific, large income promise — “six figures,” “replace your job,” “retire early” — without a documented, verifiable source.
• A required starter kit or ongoing purchase minimum to stay eligible for commissions, regardless of retail sales.
• Luxury imagery — cars, trips, oversized cheques — offered as proof rather than a testable claim.
• No income-disclosure statement offered, or one you are not shown before you pay anything.
• Pressure to buy more inventory than you could plausibly sell to hit a monthly quota.
• An income disclosure that, if you read it, shows most participants earn little or nothing — treat this as the true expected outcome, not an exception that will not apply to you.
• A refund or buyback policy that is difficult to actually use once you try to exercise it.

If it’s happening to you

Before you pay anything. Ask to see the company’s official income-disclosure statement, and read the actual numbers, not the marketing summary of them. Ask, in writing, what share of company revenue comes from sales to people outside the business rather than from other participants.

1. Stop recurring payments or purchases you can cancel. Check your contract and any auto-renewing subscription or “active status” purchase requirement.
2. Request the company’s refund or buyback policy in writing, and use it before too much time passes — many such policies have a narrow window.
3. Dispute the payment if it is recent enough. See chargeback.
4. Keep every marketing claim you were shown — screenshots, messages, webinar recordings. These are exactly what the FTC’s cases here were built from.
5. Report it to the FTC at ReportFraud.ftc.gov and to your state attorney general. See where to report for other countries.
6. Watch for a redress process if the company you joined is later sued or settles, as in the three cases on this page — refunds and restitution have arrived years after the fee was paid.
7. Do not pay a further fee to “graduate” to a higher recruiting tier to fix a losing position — that is the same treadmill, not an exit from it.

Where the money goes

Directly into a registered US company, and back out through the compensation plan itself — there is usually no laundering chain to trace, because the business model is the entire operation.

A new distributor’s starter-kit fee and recurring payments go to the company, which pays out commissions and bonuses up the recruitment chain under its published compensation plan. In the documented cases here, those payouts were funded overwhelmingly by other participants’ fees and purchases rather than by sales to people outside the business — the FTC’s Forever Living complaint puts the share of FBOs who earned anything at all from their downline’s sales at under 7%.

What comes back, if a regulator catches it, is a fraction of what was taken, years later: nearly $90 million in assets surrendered against a $795.8 million judgment in the largest case here. In the other two cases, the primary remedy was not money at all but a permanent prohibition on future unsubstantiated earnings claims — a narrower outcome than a shutdown, because the underlying business, selling a genuine product, is not itself illegal.

By the numbers

No published dataset breaks this scheme out as its own category yet, so there is no chart to show. The data page explains which agency categories exist and why some schemes are invisible in official statistics.