People often get involved in a network marketing program as a result of a friend or family member inviting them,unfortunately they often times do not know what they are getting involved in. They hear about the opportunity and the ability to generate revenue, and are totally blinding by what they are getting involved in.
Also, because there comes inherent trust with a friend and family member, you trust that they would never get you involved in a scheme or a scam. The problem is that the wool may be pulled over their eyes as well and they may be in the exact state as you are, thus this is how the propagation of a potential pyramid scheme can gain traction and popularity.
So how do you determine whether you are involved in a pyramid scheme, or worse yet, performing illegal behavior yourself by being involved in a pyramid scheme. I am going to help you comprehend this and make a decision for yourself as I break down pyramid schemes, how they operate, and the potential implications of being involved in one.
What is a Pyramid Scheme?
A pyramid scheme is by definition the following (direction from the Competition Bureau jurisdiction of laws of any company operating in Canada).
So if you are involved in something that appears as this, then there is a good chance you are involved in an illegal scheme. The problem is that such a high rate of pyramid schemes operate under the radar of the FTC for so long, that you could potentially be involved in illegal activity without actually knowing it.
So if you are joining a program, and your sole purpose within that program is to promote the very same program, there is a very good chance you have not only been scammed by an illegal scheme, but a very good chance you are being asked to do the same to others (thus these illegal companies are not only robbing banks, they are getting you to rob banks too).
Some obvious signs of a pyramid scheme, that should not be overlooked.
(1) High ticket/expensive products. Companies that are charging several $1,000’s for the ability to promote that very same product or service should be looked at in more detail. Often times these companies will mask these high costs as being education costs or ad package costs. You will also find that it is quite common place to have masterminds, seminars, and retreats involved in pyramid schemes to mask what is really going on.
(2) When 97%+ of participants in the scheme don’t make money. Any multi-level marketing company that is doing business in the first world nation (in particular the USA) is required to have detailed compensation plan information as well as income disclosures. If you find that less than 3% of people earn all the money within the program (or most of it), it will definitely fit the qualification of being a pyramid scheme.
(3) Cryptic wording as to how you will be making money. Most pyramid schemes will draw you into the program without acknowledging the costs up front, or what you will be doing to earn money. They often sell their “scheme” on lifestyle, on your ability to EARN lots, and your ability to generate a mass amount of revenue with a turn key business. The reality is, once you get in the door you become a victim of their sales process and it isn’t uncommon for the sales coaches/reps to ask you to sell your car, take capital out of your retirement, remortgage your house or max out your credit cards in order to pay for their high fees of the platform.
(4) The training is focused on you promoting the same program. If you get into a given program, and you find out your goal as a participant is to recruit others into the same program, then you are likely involved in a pyramid scheme. Often times these schemes are masked with all sorts or products (that serve as a facade), but the fundamental underpinnings of all the company revenue ticks along as a result of the scheme itself: You spend money on the program, then getting others to do the same, that get others to do the same.
Pyramid schemes are inherently doomed to fail. The reason being is that in order to feed the mouths at the top of the food chain, there is the constant requirement of newcomers (new money) coming into the program. Once this stops, the chain breaks and the pyramid can no longer survive. This is why you see many pyramids vanish, without interjection of the FTC. The ALL eventually will collapse.
If you are involved in a multi-level program that feels as though this is what it is doing, tread very carefully. You may be involved in illegal activity yourself and could run the risk of fines and or jail time (which I will be getting into). Also, if you have been involved in something that you believe is a pyramid scheme and you feel as though you have been taken advantage of, you can report the scheme to the FTC and other country-specific regulatory entities.
- Report to FTC (United States)
- Report to Action Fraud (UK)
- Report to Competition Bureau (Canada)
- Report to Scam Watch (Australia)
In the case where the regularity entity follows through with the investigation, you stand a chance to receive compensation for your losses.
Typically entities like the FTC will seize assets and sue the associated companies, helping the consumers involved report a portion of the investment losses to these unscrupulous programs.
Recent Pyramid Scheme Shakedowns?
There have been many different pyramid scheme take downs in the recent year and my suspicion and natural assumption is that there are going to be many more in the year ahead.
There are many pyramid schemes and ponzi schemes that have suffered the demise of the FTC and SEC (as well as other regulation entities worldwide). There is an excellent resource called PyramidSchemeAlert.org that you can check at any time as they will give you oversight and insight into companies that are being investigated for being pyramid schemes.
The biggest issue with this is that those involved are intrinsically responsible for a scam, if they are promoting the same scam to others. Those that were involved in BitConnect for example, lost an incredible amount of money and also worried about the idea that they are potentially liable for those they referred into the scam (and made money off of).
Needless to say, BitConnect is just one of MANY schemes shut down in recent months with many more to come as we move through the year ahead.
Am I Liable if I Refer Someone Into a Scheme?
Yes. The long and the short of it, if you are involved in an illegal scheme even as a distributor or as a participant, you carry liability and are deemed no different from the owner of such scheme. If you are knowingly promoting a scheme that is eventually deemed a pyramid by a regulatory authority, you could stand a substantial risk to massive fines as well as in some cases jail time.
If you meet the criteria that has been underlined and you feel as though you may be involved in something that is operating as a pyramid scheme, it is a good idea to stop. It is also a good idea to report it to the appropriate entities to avoid any potential legal issues down the road.
Contact the appropriate legislative authority based on your country rules (a simple Google search will help you with this). They will give you sound advice and point you to the appropriate channels to start an investigation on the given company.
Am I Selling a Pyramid Scheme Without Knowing it?
So in summation, it is more than possible that you are involved in and actively promoting a pyramid scheme without knowing it. All pyramid schemes were once defined as legitimate before they were eventually investigated and determined to be operating as a wolf in sheep’s clothing.
Since there is an underlying responsibility to those involved in the sell of anything (even as a distributor), you have to really be careful and understand what you are getting involved in. If you sense that something doesn’t feel right and you sole source of income (and the sole source of all the income of those involved in your program) is to promote others into the same program, then red alarms should be raised.
If you have had to spend a large sum of money to get involved in your MLM program, then chances are you should be looking into it in more detail. You could be involved in a pyramid scheme. If you have to upgrade to a certain level within the program in order to sell that level, that is criteria that should be taken very seriously as those are traits of many of the most prolific pyramid schemes that an example has been made of by the FTC, SEC, and other regulatory entities worldwide.
Be careful out there. Although there is protection against these sorts of programs, it is still very much the wild west and these regulatory entities only have so much in the way of resources.
I would love to hear your thoughts, stories, feedback, opinions and of course if you have any questions in relation to pyramid schemes, please do leave them below.
The first time I got involved into a Pyramid Scheme was in the early 90’s when phone cards were all the rage. It was a binary plan where you had to pay hundreds of dollars to become a member. The cost of the actual phone cards could not by themselves create a decent in come for anyone. They got closed by the FTC. Fortunately I was not able to recruit anyone.
There were two other MLM related companies I got involved in that used R&D and manufactured their own health related products. I benefited from the products and remained as a customer. Jay Neil in fact uses their products. The company is called USANA Health Sciences.
My final MLM company has saved me thousands of dollars in legal fees, scams and unscrupulous contractors. They are called LegalShield and are very successful.
The bottom line is as you stated, if a company has a legitimate product that is fairly priced, encourages its associates to market the product just as much as the business, and has reasonable fees to become an associate, then it is legal.
But these are few and far between. However, since the business model of ALL MLM companies depends on a network of associates to sell the product, there is going to be focus on a combination of finding customers as well as business associates. It is up to those who get involved to decide what works best for them.
In fact, it is possible to use the affiliate marketing model to earn good money in these companies without having to recruit any business associates because the product themselves have great value.
Thanks for illustrating the pitfalls of pyramid schemes Kyle. Red flags are overpriced products and excessive fees to join, and a total focus on recruiting new people which are necessary to feed into illegal compensation plans.
Affiliate marketing is the way to go to create a stress free online business.
Today is definitely MLM day for me because this is the fourth MLM related article I’ve read lol.
This is a very comprehensive breakdown of what MLM is though. A pyramid scheme with a product involved as an excuse to move money through the ranks.
You mentioned that they are all doomed to collapse eventually, although I do see that some big ones (Amyway, Herbal life, Mary Kay etc.) have been around for a long time and seem to pop up every once in a while. What do you think the explanation is for that?
These programs tend to exist when they have a tangible product (not digital) and their scheme is focused moreso than others when it comes to actually selling the product.
There is a lot of reading material out there if you want to read about the idea that Mary Kay or Amway, or Herbalife are pyramid schemes, some very authoritative figures have indicated they are and the FTC just recently required Herbalife to make some major changes to their business model (which I think was good for the industry as a hole).
There are many that get taken down though, large companies and even ones generating 100’s of millions or even billions of dollars. I think with the ubiquity of programs running digital products as their “product” these days, they very little tangible distribution costs and they are also becoming very expensive within many schemes. I think there is going to be focus more on these, versus the tangible products in 2018.
We will see though. One thing that you can be sure of is that there are many programs that are illegal schemes out there that are simply surviving right now because the FTC and other regularity entities haven’t quite got to them yet.
What do you think about wade lightheart book products and the Kangen product marketing. do you think it’s a scam?
I am not familiar with either, but I can tell you that if a product price is inflated for the mere purpose of compensating participants within an MLM, and supporting a upline/downline structure, I would be skeptical of this. You see this a lot within the health world, but not limited to that.
If your senses are telling you that it is a scam and there are red flags going off, then it more than likely is.
I’ve always heard about pyramid schemes and had a basic understanding of them but your article really explains things in depth and I understand them a lot more now.
I didn’t realise that anyone who’s involved in these schemes at all can face such serious consequences, I just thought the people at the top who start one of these were the ones liable and in trouble if found out. It’s sad really that a lot of the people at the bottom can get into such trouble too when they’re probably unaware they’re doing something illegal and don’t realise it’s a pyramid scheme when I’ll bet the ones at the top know full well what they’re doing is wrong.
Most people don’t realize that when they are involved in something illegal, they can carry the exact same responsibility. Like being an accomplice to someone robbing the bank, although you were waiting out in the car for the actual person taking the money, you are still very much involved and can be charged.
The same goes for the multi-level marketing space, if you are promoting something that ends up being illegal (and it was the entire time), then you can carry the same responsibility.
I know that here in Canada there have been many people charged that were “participants” in pyramid schemes or ponzi’s and actually were not the owners. If you are doing something unethical and something that is fraudulent, in my mind and in the regulatory entities it doesn’t matter if you are owner of a particular scheme or involved in it.
That is why anyone should really do their due diligence before joining an MLM, there is a very good chances these days you are at the very least getting involved in something that is unethical.
I am in a marketing class in high school, and when we learned about pyramid schemes, I never fully got the concept, but now I do. I am glad I read your article at a young age because, over time, there is going to be a lot of programs that are scams.
What are some ways to make sure our businesses are ethical and not schemes? I read some previous comments on this article and it seems like the consequences are serious. hope to read your response, thank you for sharing this.
Wow, that is great that they are teaching this sort of thing in high school (pyramid scheme avoidance). Fortunately your generation will be more equipped and savvy when they see something of this nature within the online world, they will hopefully know what to look for what to avoid.
I have mentioned some of the main things to look for above, but one of the most common signs is being sold on something without knowing exactly what it is you will be doing to earn money.
All too often you will be pushed the idea of a brilliant lifestyle, usually some guy pitching you on a beach or while on vacation…or within a fancy car, and they you have to sign-up to an email list in order to get more information. That is almost CERTAINLY going to be a scam, maybe not a full blown pyramid scheme, but a scam. That is the tactic most of the scuzziest marketers are using these days and you want to avoid anything that smells of that.
If they can’t explain their product, their business, how it works, before you give them any of your personal details, walk away. Actually run away. They are likely going to be trying to take advantage of you and use you as a financial tool for their own personal gains.
Thanks, Kyle! I will definitely look for those red flags!
I don’t know how many times I see pyramid schemes and I wonder why are people promoting them when there is no future career in doing that. I try to tell people all the time because I even tried one a long time ago and it will suck your bank account dry and you probably wont make anything.
The problem is that people are making money promoting them. Very few people, the average MLM or pyramid scheme has a ratio of around 97% of people LOSING money, and around 3% of all the participants making money.
The people that are making the money tend to shout the loudest and brag about their success (they do this in order to create hope for those they are trying to suck into their scam), and those that lose money typically don’t have a means to communicate or are tied up with “non disclosures” they sign before getting into these programs which curb their voice and protect others.
If more people only understood the 4 things to look for to avoid pyramid schemes, then there would be a lot less people getting ripped off.
You hit the nail on the head, Kyle. I’ve come across a few MLM companies that end up being legitimate, but if you look at their history, they often have a track record of lawsuits when they first started up.
While not all MLM companies are pyramid schemes, if they fit those 4 criteria Its safe to say they are a pyramid scheme.
When looking at different MLM companies, the good ones will be up front and honest from the get go about anything involved, and not hide any costs like a pyramid scheme would.
Thanks for laying things out so clearly!
What happens is that many of these companies will start off as a completely obvious pyramid scheme, and then over time they realize this and they try to become legitimate.
The problem is by that time, they already have left far too many traces of what they have done in the past and their new layers of legitimate “facade” tend to get drilled through very easily by the FTC (whom has access to all records and states of a company as they start to probe).
There are lots of legitimate MLM’s out there, but it is when they are reliant on recruiting to drive their business or they are forcing people to spend large sums of money for the benefit of promoting that same “large ticket” level/category to someone else. These immediately should draw red flags for any opportunity seekers.
What advice would you have for someone who realizes the error of their ways and has recruited too many people into the scheme?
I’d find it hard to go all of them and fess up my wrongdoings to them in fear of permanently burning the bridge with them. Even if I know it is the right thing to do.
Also within that same topic, if those people that were recruited loss a decent amount of money, how does that sponsor make that up to them?
I would recommend that first, you get out of the scheme if you are still within it. Then I would recommend that you contact the FTC or regulatory authorities letting them know what is going on, I would put too much onus on yourself unless you were knowingly promoting something that was a fraudulent or pyramid scheme.
Rather if this is something that has been revealed through you having a better understanding, you are going to be fine, but I do recommend that you contact authorities and make them aware of the program to save others from losing a lot of money.
As for making money up to people, if there is a class action against the company, they will likely be able to get a portion of their money back (although it can take a few years). This is currently happening with several companies right now, their assets are seized immediately and then the regulatory decides how to divide things up.
I wouldn’t panic though Jessie, but I would recommend that you do the right thing instead of moving forward in complete silence.
Thanks for the great advice on giving me the good oil about how to avoid Pyramid Schemes. It was really interesting to read that you can actually face fines or jail times if being caught as an associate.
Is there any genuine ways to make money online that do not come with a Scam Attached?
Yes, there are lots of ways to make money online without being involved in a scam. The problem is that there are so many and because many of these operations are faceless (or don’t have to deal with people in person), that the online world has become synonymous with anything related to an “opportunity” being a scam.
Like offline business, online business is a vast world of opportunity, legitimacy, and there are millions of business ethically thriving within the online world. There are a lot of people like yourself and myself, operating as affiliate marketers, internet marketers, product creators, dropshippers, etc…and building significant businesses doing so.
If anything, the online world has given all of us a cost efficient, low barrier entry into creating a business online, one that has never been seen online. Unfortunately, where there is opportunity there is vultures and there is going to be illegal schemes and scams created (like pyramid schemes).
I almost got caught up in a program that appeared just like what you have outlined here. I attended a seminar in New Jersey several weeks back and they were pitching the idea of really high ticket commissions.
They had a fellow speak to us that was in the program at the most expensive level, and he told us how much money he was making. He almost seemed like an employee though because he wasn’t teaching us much, he was selling us on hope and the dreams of making money like them. I have no idea even if they made money or they were a paid speaker trying to push this crap to us.
After the seminar, they tried to pitch us on a $500 product and also pitch us on the idea of investing into masterminds that were very expensive some more than 20k i believe.
Anyways it felt like a total scam, and after reading this I think we could probably fall directly into a pyramid scheme category. Thanks for giving me a new sense of clarity on this topic.
That is a very common tactic used by these companies. Certainly not all seminars are a bad thing, there are some good ones, but these high pressure sales ones are typically the craft work of companies within the MLM space that are operating as a pyramid scheme.
Another tell tell sign is if they are requiring your to upgrade the MLM at certain levels in order to make larger commissions within the company. When you mentioned that the speaker at this event was trying to sell you on the idea of their particular status, this is subtly what they are attempting to do. Get you warmed up to the idea of spending a lot more, just so you can have that status and earn the larger commissions.
I have been having a friend push a product on me and tried to emphasize how quick I had to join to the program because the program only had a few spots remaining.
I didn’t join because I don’t like to pressurized into joining stuff.
I decided to do some research about it instead, and have seen it has these crazy promises of buying a Rolls Royce in a month, and they don’t tell you what exactly you’ll be working on.
The red flag went up for me immediately I saw this, luckily I didn’t join.
Well I am really glad you did your due diligence. Pitches like this and saying there is “only a few spots left” is the exclusivity that these programs utilize to pressure you into joining fast. It is very easy to get cold feet when something doesn’t feel right and they certainly don’t want you going off and doing research (as that will almost certainly reveal their pyramid scheme).
To me, a friend isn’t a friend that is trying to use YOU as a financial instrument in their business. They are not better than the company that is a pyramid scheme itself if they are trying to get you involved in the same scheme. And we need to remember, the only way to earn money in these types of programs is getting “others” involved beneath them.
Scams like pyramid schemes are hard to avoid and almost everyone gets pulled into them.
I was once almost pulled into a pyramid scheme, not an online one but still. They held seminars and everything and everyone had to bring “guests” so they can hook them in. They promised “You can make a million dollars in a month!” over and over haha.
Long story short, I almost fell for it (my friend not so lucky). Thank you for the information, I think everyone needs to know to avoid it!
The problem with most programs like this is they play on your heart strings and hope. They get you in a room, such as a seminar and then basically outline how much money you will make (without telling you what you are going to be doing), get a few of their top sales reps in the room, and then invoke high pressure sales on you before you leave.
It works. That is the problem. People continue to fall for this, even educated folks that should know better. I hope as time goes on people can educate themselves on what to look for in a pyramid scheme and you can almost be assured that if you are attending a seminar and they push a high ticket product within it, showcase HUGE successes, you are getting involved in something that is likely illegal, if not working on the fringes of illegality.
I am really glad you didn’t fall for the scheme, but it is unfortunate your friend did. If they were unable to get their money back from their investment and they believe it is a pyramid scheme, recommend to them they contact their local regulatory authorities (FTC if you are located in the US, otherwise Google whom your regulatory entity is).