Pyramid Schemes and Scams

What the Slick Snake Oil Salesmen Don't Want You to Know

Pyramid Schemes and Scams

“ I made $10,000 my first month, and you can too with my fabulous system!”“I’m only 25, and I am already retired and I just want to share with you how you can do this too!”“…send $5 to the top three people on the list, add your name to the bottom and just wait…you’ll end up with 1 million dollars!”

We’ve all heard these promises that sound too good to be true. And if you’ve been on the internet at all you’ve most likely seen these flashy pages that promise you wealth and riches if you do their easy program.

Are any of these legitimate? How do you tell pyramid schemes from real opportunities? We’ve seen countless people ripped off by getting sucked into all that hype and false promises. And we’ve seen people walk away from a good opportunity because they’d been scammed in the past and no longer trust anything.

What we want to do, is give you some framework by which to judge what you see out there. We want to see people make educated decisions when they are evaluating business opportunities.

Let’s talk Pyramid Schemes. Pyramids are illegal. Some people mistakenly think that Multi-Level-Marketing is a pyramid. It may look like one, but it is not . With pyramid schemes, the primary way you get paid is by bringing others into the organization, and there is no selling of products or services to the public. Pyramid schemes basically promise large profits based on your efforts to recruit others.

Beware of a “product” used to disguise one of these pyramids. Some of these pyramid scheme organizers try to get around this by offering something that looks like a real product. But watch out.

These products are just used to disguise the scheme. The product might be a software program, e-book, or list of names for you to market the program (pyramid) to, and is sold to each new recruit. However, these “products” would be worthless if you tried to sell them to others not involved in the program.

A legitimate company will have products or services for you to sell to the public. The Federal Trade Commission (FTC) is always going after these schemes and looks closely at any company claiming to be an MLM. If you knowingly participate in one of these pyramid schemes watch out. When the FTC starts prosecuting the organizers, you could find yourself named as a defendant.

So look for companies that offer real products and services to be sold to the public. There’s something to look out for here too. If a company requires you to buy a lot of product, more than you can really sell in a reasonable amount of time, this is also considered a pyramid. If you are asked to purchase a significant amount of inventory to qualify for other levels - this is also a pyramid. In a legitimate MLM, you attain levels by actually selling the product.

You Don't Need to Work Your Way Up - Just Buy Your Way Up

OK. So for those of you who want to read the legal guidelines that the FTC puts out, here you go:

“MLM - also known as "network" or "matrix" marketing - is a way of selling goods and services through distributors. These plans typically promise that people who sign up as distributors will get commissions two ways - on their own sales and on the sales their recruits have made.

Pyramid schemes - a form of multi-level marketing - involve paying commissions to distributors only for recruiting new distributors. Pyramid schemes are illegal in most states because the plans inevitably collapse when no new distributors can be recruited. When a plan collapses, most people - except those at the top of the pyramid - lose their money.

MLMs should pay commissions for the retail sales of goods or services, not for recruiting new distributors. MLMs that involve the sale of business opportunities or franchises, as defined by the Franchise Rule, must comply with the Rule's requirements about disclosing the number and percentage of existing franchisees who have achieved the claimed results, as well as cautionary language.”

Here are more guidelines put out by the Direct Selling Association- www.dsa.org.

1. “How much are you required to pay to become a distributor?

If the start up cost is substantial, be careful! The start-up fee in multilevel companies is generally small (usually for a sales kit sold at or below company cost). These companies want to make it easy and inexpensive for you to start selling. Pyramid schemes, on the other hand, make nearly all of their profit on signing up new recruits.

Therefore, the cost to become a distributor is usually high. Caution: Pyramids often disguise entry fees as opart of the price charged for required purchase of training, computer services, product inventory, etc.

These purchases may not even be expensive or "required," but there will be considerable pressure to "take full advantage of the opportunity."

2. Will the company buy back unsold inventory?If you could be stuck with unsold inventory, beware! Legitimate companies which require inventory purchases will usually "buy back" unsold products if you decide to quit the business. Some state laws and the DSA Code of Ethics require buy-backs for at least 90% of your original cost.3. Are the company's products sold to consumers?IF THE ANSWER IS NO (OR NOT MANY), STAY AWAY, it's probably a pyramid shceme! This is a key element. Multilevel marketing (like other methods of retailing) depends on selling to consumers and establishing a market. This requires quality products, competitively priced. Pyramid schemes, on the other hand, are not concerned with sales to end users of the product.

Profits are made on volume sales to new recruits, who buy the products, not because they are useful or attractively priced, but because they must buy them to participate. Inventory purchases should never be more than you can realistically expect to sell or use yourself.”

Here is our advice for ferreting out those pesky illegal and potentially costly scams:

• The company must sell real products or services to the public.

• The products or services must have real value in the marketplace, and be priced fairly for what you are getting.

• The company must not pressure you to buy more products than you can realistically sell in a reasonable amount of time.

• You should not have to buy a bunch of products to qualify for higher levels. These levels should be earned by selling your products to consumers, not having to turn your home into a warehouse to hold tons of product that you might eventually sell.

• The emphasis should be on retail selling, not just recruiting of a downline. While this is important for the growth of the organization, the main focus should be the product or service.

• Reasonable product use requirements. You may be required to use the product you are selling. That’s fine, but the requirement should be what you would realistically use personally.

• You shouldn’t be expected to buy extra materials unless you want to. This might be training materials, marketing literature, or product samples.

• Sign up costs should be reasonable. This usually includes a sales kit, or supplies to get you started in your new business. The expense should be about equal with what you are getting in return.

• Companies should have a “buy-back” policy for products that have been unopened and unused. This should apply to distributors that either bought too much of their products, or who are quitting the organization.

• Distributors in a company who are actively building their businesses by recruiting others, should be expected to provide training, mentoring, and support to their downline to ultimately sell the product or service to the public.

There are many good, respectable, legitimate companies out there. Do your research. Don’t get taken in with the flash, glitz, and glamor you may see out there on the internet. If you find a company with a product or service you can believe in and be passionate about, you will have a great shot at success : )

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