FTC Files Lawsuit, Claims Vemma Nutrition Company is a Pyramid Scheme
A federal court has temporarily shut down a multilevel marketing company that the Federal Trade Commission (FTC) claims is an illegal pyramid scheme.
The complaint alleges that Vemma Nutrition Company lured college students and other young adults with the prospects of making big money, but the vast majority make nothing.
The company, on the other hand, earned more than $200 million in 2013 and 2014.
Vemma members, called affiliates, sell health and wellness drinks that claim to be chock full of vitamins and antioxidants that boost energy, fight illness, and fight against free radicals that lead to premature aging. Like many multilevel marketing companies, Vemma affiliates can earn income by enrolling others as affiliates or as customers, but the FTC alleges that the company focuses on recruitment rather than retail sales of its products to generate the majority of its income.
The company's websites, social media, and marketing materials show young people who have bypassed college and student loan debt to own luxury cars, jets and yachts, and falsely claim that affiliates can earn as much as $50,000 per week. Affiliates pay $500 to $600 for an affiliate pack of products and businesses tools and must buy $150 in Vemma products to remain eligible for bonuses, and must enroll others to do the same.
The FTC claims that Vemma rewards affiliates for recruiting participants rather than for selling products. The company offers little guidance for selling products and instead focuses on how to recruit new participants. Vemma offers no meaningful discounts or incentives to encourage retail sales.
Last week a federal court froze the defendants' assets and appointed a temporary receiver over the business pending a trial.
Vemma isn't the only supplement maker in the FTC's crosshairs. Last year the agency opened up an investigation into Herbalife after cries from the public and legislators that it was a pyramid scheme. That investigation is ongoing.
When a Multilevel Marketing Company is Actually a Pyramid Scheme
People who are involved in multilevel marketing sell products to the public and earn commissions, not only for their own sales, but also for the sales made by people they recruit. Known as consultants, affiliates, or members, these people sell their products directly to consumers or through parties in which the host gets product discounts based on sales made at the end of the event. These individuals are encouraged to recruit other sellers and will receive an additional commission based on their recruits' sales.
While there are plenty of legitimate multilevel marketing companies, there are others that are not. The FTC says that if the money you make is based on the number of people you recruit and your sales to them, it's a pyramid schemes, which are illegal.
Many multilevel marketing companies blur the lines between legitimate and pyramid scheme so it can be hard to tell if one is a venture in which you should invest.
To spot a pyramid scheme, the FTC says to look at a couple of factors. First, is how you earn income. If you earn income based predominately on how many you recruit into the program, it's a pyramid scheme. Retail sales come first in a legitimate multilevel marketing company.
If you have to buy products and other things to stay in good standing with the company, it's likely a pyramid scheme. For example, Vemma affiliates are told to spend $150 a month on products to stay in the monthly bonus pool.
If the marketing material includes lots of swag and sells you a luxurious lifestyle, it's probably also failing to tell you how many affiliates make it to such a high level of success. According to Vemma's own income disclosures, 9 out of 10 affiliates made less than $6,200. Those numbers don't include the initial purchase and monthly purchases.
More information about multilevel marketing and the Vemma lawsuit can be found on the FTC website.