This week, the Federal Trade Commission (“FTC”) obtained a preliminary injunction in the U.S. District Court for the District of Arizona, ceasing the operations of certain businesses and individuals, including multi-level marketer Vemma Nutrition Company (“Vemma”), which the FTC has accused of running an illegal pyramid scheme.

How did Vemma’s operations draw the scrutiny of the Feds?

According to the FTC, Vemma utilized its website, marketing material and various social media outlets to entice young adults and college students to become affiliates in its program to promote health and wellness drinks with promises of substantial income. However, according to the FTC, such income was generated with a focus on the recruitment of other affiliates into the organization, rather than through the sale of products. As such, the FTC alleges that the vast majority of affiliates make no money and, in fact, lose money as a result of the required initial investment of $500-$600 to become a member and additional monthly purchases of $150 worth of Vemma products to remain eligible for certain bonuses.   The FTC alleges that losses experienced by the members are inevitable because the operation is an illegal pyramid scheme that does not provide the affiliates with the necessary training or guidance to encourage actual retail sales, and only rewards members for recruiting other participants into the program.

Be Aware of the Important Differences between Multi-Level Marketing Programs and Pyramid Schemes

We have previously written extensively on the subtle, but significant distinctions between multi-level marketing programs and pyramid schemes. Importantly, in order for marketers to avoid legal pitfalls, compensation under their programs should be earned predominantly through commissions on sales, and not rely on recruitment of participants into the applicable programs. Given the current regulatory climate, it is important for multi-level marketing ventures to engage knowledgeable counsel to review program terms and conditions and related marketing to determine whether the subject programs comply with applicable law.