The shift to internet life and social media has led to a new wave of pyramid schemes and MLMs (multi-level marketing companies). These companies use social media to recruit new members, often by promising them easy money and financial independence. However, these promises rarely come true. Instead, the vast majority of people who join MLMs lose money, and many end up in debt. In fact, MLMs have been called “legal pyramid schemes” by the Federal Trade Commission.
If you’re considering joining an MLM or pyramid scheme, knowing the facts is essential. In this post, we will look at MLMs and pyramid schemes and how to avoid falling victim to financial fraud.
What are MLMs and Pyramid Schemes?
MLMs (Multi-level Marketing companies) and pyramid schemes are two different types of business models, but they often get confused with each other.
An MLM is a legitimate business model where a company compensates its members for selling its products or services. MLMs typically operate with multiple levels, where members at the lowest level recruit other members and are paid a portion of their sales. They also earn commissions from the sales of their recruits. This can create a pyramidal hierarchy, which is where the confusion comes in.
Pyramid schemes are illegal and commonly masked as MLMs. They involve recruiting members with the promise of making money solely through those recruits, without actually selling any products or services. Unfortunately, this often leads to financially devastating losses and people being left empty-handed.
Learning to recognize the differences between MLMs and pyramid schemes is critical to avoid being taken advantage of.
How Do MLMs and Pyramid Schemes Work?
MLMs depend on recruiting new members, and they typically involve selling a product or service. Once a member has been recruited, they become eligible to receive a percentage of their new recruits’ sales commission as well as commissions from their own sales. For example, a successful MLM participant may recruit a certain number of members who make several sales. As a result, the recruiter earns a portion of the revenue.
On the other hand, Pyramid Schemes don’t involve selling a product or service. Instead, they rely on recruiting new members who pay money to join the scheme. The money is then used to compensate those at the top of the pyramid, and the process is repeated until no new members can be added. So ultimately, those at the bottom of the pyramid typically get nothing.
The promise of financial gain and fast wealth is almost always involved in pyramid schemes. Still, it’s important to be aware of the signs of financial fraud and always do your due diligence when considering any business opportunity.
Signs That an MLM or Pyramid Scheme Is a Scam
It is easy to see how MLM and pyramid schemes can be attractive opportunities to make money quickly. However, there are several signs that something is not right with an MLM or pyramid scheme. Here are some of the biggest indicators that someone is trying to recruit you for a scam.
Unrealistic Promises – If the opportunity seems too good to be true, then it probably is. Be wary of any business opportunity that promises quick wealth or offers returns that seem suspiciously high.
Strong Push for Recruiting – If an MLM or pyramid scheme is pushing for you to recruit more members without explaining the details about its products or services, then you should be wary.
High-Pressure Sales Tactics – Whenever a corporation uses high-pressure sales methods to get members to buy more items or services, it’s a tell-tale sign that they may be attempting to defraud people.
No Transparency – If a company is not open about its operations or how it makes money, it is most likely a hoax.
If any of these things seem true of an MLM or pyramid scheme you are considering joining or investing in, it is best to stay away. Remember that before investing in any business opportunity, you should conduct your own investigation to guarantee that it is authentic.
How To Avoid Falling Victim to an MLM or Pyramid Scheme
Like any investment, you must understand the business before putting money into an MLM-based opportunity. Here are some tips to help you ensure you are making an intelligent decision:
Do Your Research
Don’t fall for high-pressure sales tactics. Instead, take the time to investigate the company and learn how it operates. Make sure that you are fully aware of all the risks.
Check Reviews
Look for independent reviews from people who have tried the MLM or pyramid scheme. See what kind of feedback they have and if it seems genuine or just fake reviews written by the company.
Talk to People Already in the Scheme
Talk to people already in the scheme to understand their experience and if they have been able to make money from it. Try not to take the word of promoters or those who could profit from your membership.
Ask Questions
Make sure to get answers to any questions you have about the MLM or pyramid scheme. This could include questions about the product, how the scheme works, and the costs associated with participating.
Test it Out
Finally, try it out first before investing your money into it. This way, you can test the scheme without risking any money.
Examples of Real Pyramid Schemes
Pyramid schemes and Multi-Level Marketing (MLM) companies that engage in deceptive practices are illegal in many countries. Once discovered, they are typically shut down by regulatory authorities. Here are some examples:
TelexFree: This $3 billion Ponzi scheme operated in Brazil and the US until 2016, when the company was shut down, and its founders were arrested and charged with fraud.
Fortune Hi-Tech Marketing (FHTM): FHTM was a Kentucky-based MLM company that was shut down by the US FTC in 2013 for operating a pyramid scheme that deceived its distributors.
Vemma: In 2015, the US FTC shut down Vemma, a health and wellness MLM company, for operating a pyramid scheme that promised its distributors high earnings but in reality, almost all of them lost money.
Closing Thoughts
While some legit MLM opportunities exist, many are simply unwise investments. Therefore, it is best to be aware and protect yourself and your loved ones from scammers. Remember that pyramid schemes are designed to take your money and leave you without knowing what you have invested in and without any returns. To ensure you are not the victim of financial fraud, do your research, check reviews, talk to people in the scheme, ask questions, and try it out before investing your money.
