The Government of United States of America has come out with federal multi-level marketing and anti-pyramid statutes. They have been mainly introduced to protect customer interests. There have been many illegitimate programs running under the guise of multi-level marketing or MLM, which were out there to fraud people and cheat them of their money. They promised individuals of huge returns within a very short period of time and also told them that they did not require putting in much effort. Such schemes have been referred to as Ponzi schemes, airplane plans, pyramids, chain letters, etc. though a relatively recent phenomenon, such fraudulent programs have cheated the participants of hundreds of millions of dollars. With such malpractices on the rise, the federal and state regulatory agencies have introduced many statutes to tackle the problem.
According to the regulations of the government, MLM is a legal way of conducting business. However the pyramid model is not. The two programs differ mainly in two ways:
To explain the second point more clearly, if someone is compensated just because of the sales they achieve along with their recruiters and down line, then such a scheme would come under multi-level marketing and hence would be considered legal. If however the compensation package depends on how big a down line you have, or the number of people you bring in to the program, then the whole thing is illegal.
Before any company starts its business as a multi-level company, it should guard against from being considered as a pyramidal program. Yours can be considered as a multi-level company if you sell, distribute, or supply goods or services through independent agents contractors or distributors. These agents or distributors can further appoint their own set of subsidiary agents and distributors. However any kind of payment that your company makes, whether as commission, or bonus, or dividends, should be solely based on the sales achieved and not on the number of agents or distributors one recruits.
So any company which enters into the market should guard against falling into the trap of paying its agents just on the basis of the down line he creates. If a company, either knowingly or mistakenly, does so, it will be considered to be running a pyramid structure of business. And running any such programs is a punishable law according to federal and state laws of the United States of America.
There are definite reasons for making pyramidal schemes illegal. The basic reason is that if you are being paid for the number of people you enroll and not for the sales you achieve, then there must be something wrong with the program. What such companies do is to basically ask you to make an upfront payment to enroll as a member. Initially they pay off the members from the money they earn from newer recruits. But a time comes when they just shut down their business and are no where to be traced. They only wait till they have a sizeable number of members so that the money they are able to cheat is large enough.