How Pyramid Schemes Were Legalized: From Living Rooms to the White House

Today Multi-level marketing (MLM) companies such as Herbalife, Amway, Lularoe and more are legalized iterations of pyramid schemes dating back to the 1940's. The stock market crash caused many to distrust big business, banks and corporations, so direct selling gained popularity.

The first company known as an MLM is Nutrilite, a vitamin and supplement company that started in 1934. Nutrilite paid employees not just for product commissions, but also for bringing on additional salespeople, plus bonuses for all sales made by their recruits.

Nutrilite founder Carl F. Rehnborg is credited with creating the multi-level marketing model in 1945. In 1949, Jay Van Andel and Richard DeVos joined Nutrilite as independent distributors. The two would later go on to become founders of the largest MLM in the world - Amway.

In 1949 the Federal Drug Administration accused Nutrilite of false advertising, so Van Andel and Devos created Amway which used the same model and to sell household products. In 1972 Amway bought controlling interest of Nutrilite and took complete ownership in 1994.

As Amway and this direct sales model was growing in popularity, so too was something called "Airplane Game". It involved people hosting parties in their living rooms where a "pilot" would offer the chance for "passengers" to earn $12k.

The game was simple. You pay $1,500 to attend a party, then move up the ladder from party to party as you and others invite additional "passengers". Each party would upgrade you to "flight attendant", "copilot", and then "pilot". By that point they have earned $12k and "retire."

Amway and the airplane game both thrived on personal networks. Salespeople reached out to friends and family to get them to pay to play. They both are also entirely unsustainable. At any point if enough new recruits do not join - all but the top levels lose their money.

In the 1970's additional multi-level marketing companies cropped up, including Koscot Interplanetary. The F.T.C. brough suit against the company in 1971 due to complaints from customers. This case set a precedent for defining if a company is engaging in an illegal pyramid scheme.

Amway, the Airplane game and the many other companies that capitalized on the MLM model suddenly became required to follow rules including ensuring that their distributors are paid primarily for sales of a product and not for recruitment of new distributors.

This is when Amway, Avon and more made the Direct Selling Association (DSA), the lobbying arm of MLM companies in order to fight against MLM regulations and pyramid scheme laws. U.S. Presidents who have publicly advocated for Amway include Ford, Reagan, G. W. Bush, and Trump.