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ARTICLE SERIES: The Dynamics of an MLM Distributorship.

The following article is written by Mr Gerald P Nehra, a prominent MLM lawyer and is re-printed here with permission as indicated. Comments by The MLM File appear below this article.

The MLM Legality Test


by Gerald P. Nehra

There are many characteristics, or "red flags" that distinguish an illegal pyramid from a legitimate multi-level business opportunity, (often shortened to MLM.) They have been written about often in many publications and by necessity often contain legal terms and industry jargon. Also, danger signs of a few years ago may have been camouflaged or fixed by the newest drafters of plans so one needs to be on guard for new and different twists. Is there a simple, easy to apply, test one can give to a business opportunity, that addresses the pyramid law risk without all the pyramid law legal terminology? There is. What follows addresses that need. It is the single-level test for the multi-level business opportunity.

It goes like this: Can one make some money SINGLE-LEVEL, that is, without sponsoring another business opportunity seeker? Note the specific use of the word "can", not the word "would". It is usually a given that the business opportunity prospect is urged to sponsor, and that the business opportunity presenter will say or imply that the "real money" is in building a group. But that is O.K., SO LONG AS - those who choose not to sponsor at all, CAN STILL MAKE MONEY. Note also the use of the word "MAKE". It's "MAKE MONEY" not "SPEND MONEY", meaning paying income taxes if the gross income exceeds expenses associated with producing the income. Buying for personal use at distributor prices rather than customer prices, while a savings, does not generate INCOME upon which one is required to pay taxes. Buying for personal use by itself is not an income opportunity. If the proposed business opportunity consists ONLY of buying for personal use and sponsoring more representatives, with no provision for sales to customers, it is flawed.

This simple test needs to be applied to two aspects of a business opportunity. The first aspect is the design. What do the company documents say about how one makes money? How does the compensation plan work? Not all the fine details of every commission, bonus or reward need be understood, but simply, can one make SOME money without sponsoring. Remember, one does not MAKE money when one buys any product or service for personal use. The application of this test should in no way imply that there is anything wrong or illegal about personal consumption. It is just that it alone cannot be the sole basis for a business opportunity.

The second aspect of the application of the test is the plan implementation. Some plans are designed correctly but are flawed in the implementation. Can one make money, even without sponsoring, as the plan is being taught and implemented by the prospective sponsor and the distributors closely associated with him or her? If there is no acknowledgment or support for the non-sponsoring participant in the business opportunity, something is wrong, maybe not in the design, but surely in the implementation. Reputable and legally designed and implemented multi-level business opportunities provide a money making opportunity SINGLE LEVEL to those who choose not to sponsor. Of course, if one sponsors others, then ADDITIONAL money making opportunities exist when those sponsored generate sales.

Apply this test to multi-level business opportunities. Look at the plan design, and look at the way the plan is being implemented by the prospective sponsor and associates. If the ONLY WAY to make money is by sponsoring, STAY AWAY, the plan is fatally flawed.

Gerald P. Nehra is an MLM-specialist, private practice attorney. He is one of only a few attorneys nationwide whose practice is devoted exclusively to direct selling and multilevel marketing issues. His 30 years of legal experience includes nine years at Amway Corporation, where he was Director of the Legal Division. He can be reached at 1710 Beach Street, Muskegon, Michigan 49441, 231-755-3800, 231-755-4700 fax. His e-mail address is You are invited to visit his web site at

Permission is hereby granted to duplicate this article, AS LONG AS the biographical information above is included. ©1999

The MLM File Comments


Mr Nehra knows his stuff. After reading this article you should be able to understand how to distinguish a LEGAL MLM structure from a pyramid scheme structure. If you don't understand the simplification above, then you will understand just how complex it can be to get to the bottom of MLM and why the legal fight with authorities has been so protracted.

Mr Nehra is concerned here to present a legally correct piece of advice. A factual "How to...". In this he has excelled. The article helps depict exactly what IS currently legal with regard to the structure of an MLM.

A lawyer, by necessity, sees only what is acceptable or unacceptable as defined by law. This is how it should be. However, the law itself is not always logical or fair.

For instance, on Mr Nehra's advice, if an MLM DOES NOT provide the opportunity (on a "single level test" basis ), for a distributor to earn income without recruiting, then the MLM is "flawed". (The law is clear: it says that a business structure that effectively recruits distributors only to consume product is a pyramid scheme or endless chain and is illegal).

However, the law also says that with the artifice of structuring a retail price above a distributor price, and with no material alteration of the illegal recruiting scheme, the whole becomes legal.

Logic would seem to have gone out the window.

Why is this so? The problem lies with the reasons that have caused the law to declare pyramid schemes illegal. Pyramid schemes are declared unfair because the last people in will lose their money. The law is silent on what happens within a growing MLM scheme as regards market saturation, taking into account both time and locality. Only close study of the complete records of MLM companies would prove the point that the dynamic of geometric progression based recruiting schemes is self-limiting and inherently unfair at any level of growth. If prosecutors would prove this point, the basis for the wealth of MLM's and their top distributors would be at risk indeed.

The judicial wheels might move slowly, but change is on the way nonetheless. More recent decisions regarding MLM insist that the predominance of a distributor's income must come from retailing. The response from MLM? Lobby the US legislature for passage of a bill created by MLM companies to ensure they can continue with their current schemes.

Considerable money has been spent over the last 50 years to create and maintain MLM's legal standing. There's no doubt that a great deal more will be spent in the near future in an effort to ensure that MLM can continue to operate with their geometric progression based recruiting business opportunities.

Why? Because recruiting is how upline distributors and MLM companies can make real money.


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