The term "multi-level marketing" is often used synonymously with the term "network marketing". Whether either expression is used, the key ingredient to a multi level distribution program is that participants are compensated not just for their own sales of products and services, but those made by others whom they bring into their organization.  Multi-level marketing systems combine a chain of distribution of products and services through either distributors, or representatives, who receive compensation through sales by distributors at other levels.  Through this process, participants in a multi-level marketing program create a "downline," consisting of individuals or entities selling products and services who were recruited either by the original participant, or, others whom the participant recruited.  On the other hand, the term "upline" consists of the person who sponsored the representative into the program as well as the sponsor of the sponsor, etc.

Yes, if the primary emphasis is on the sale of products and services to the public and representatives are not being compensated merely for recruiting others into the organization. A "pyramid" is in fact an illegal method of doing business where no product or service is offered, but compensation focuses only on the recruiting of individuals into the program rather than sale of services or products. The concern of most regulators today is whether a pyramid is being created through loading up individuals with inventory that cannot be used or resold in the marketplace. Regulators are less concerned with multi-level programs marketing services since "inventory requirements" are often non-existent.

On the federal level, both the Federal Trade Commission (FTC) and the Securities Exchange Commission (SEC) have the right to investigate pyramid schemes believed to be deceptive to the public. In addition, nearly every state has either an anti-pyramid law or a consumer protection law prohibiting pyramid schemes, chain schemes, or deceptive forms of business. In five (5) states; Georgia, Louisiana, Maryland, Massachusetts and Wyoming, specific state laws regulate multi-level marketing, three (3) of which (i.e., Louisiana, Massachusetts and Wyoming) require registration.

1. A lawful network marketing program does not pay any consideration for the mere act of recruiting. If payments are made without regard to the sale of products or services, then an illegal pyramid may exist. Under the so called “Amway Exception”, multi- level marketing systems that provide compensation primarily on sales by distributors, but also permit some incidental recruiting payments, are permitted. Network marketing companies have created programs allowing distributors to be compensated for recruiting others into their organization, after the newly sponsored representative has achieved some qualifying event (i.e., accomplished a certain number of sales within a given period of time or made a certain number of sales within a specified period of time).

2. The initial fee required to join should not exceed the business opportunity threshold, which is generally $500. In some states, this threshold is only $250 or $300. If the initial fee is greater than these amounts, the sale of a business opportunity may have occurred.

3. Avoid programs requiring the purchase of a substantial amount of products or services. In addition to possibly violating the business opportunity law threshold as discussed above, these programs may be guilty of "front loading", i.e., saddling the distributor with products that cannot be easily used or resold.

4. Be wary of any earnings claims or income projections. Earnings claims must be substantiated and have a basis in realty. If it seems to good to be true, it probably is.

5. Valid network marketing companies must be able to demonstrate that their products and services are substantially sold to consumers who are not participants in the network marketing program. Many states carefully scrutinize the amount of sales by participants in a network marketing program to each other, rather than to ultimate non-participants end-users. For example, many network marketing companies follow the 10-customer rule approved by the FTC in the Amway case. This 10 -1 threshold is used by many companies to require certain minimum sales to retail customers before commissions can be earned or products reordered from the company.

6. Illegal pyramids, where the right to receive compensation is unrelated to the sale of products or services to end-users, is often demonstrated by large, up-front payments, head-hunting fees, and inventory loading. Conversely, bona fide multi-level marketing programs pay no fee or compensation merely for recruiting participants into a down-line network, no large non-returnable investment in inventories is required to start or stay in the business and a reasonable inventory repurchase policy is offered. Inventory repurchase policies have become a major method of protection against inventory loading and help to distinguish a legitimate business activity from a pyramid scheme.