Profits in Pyramid Schemes?
Don't Bank on It!
December 1996
Think pyramids and multi-level
marketing plans are the same? Think again.
Multi-level marketing plans are a way to sell goods or
services through distributors. These plans usually
promise that if you sign up to be a distributor, you will
receive commissions - not only on your sales of the
plan's goods or services, but also on the sales of the
people you recruit to join the distributors.
Pyramid schemes have a similar structure, but a
completely different focus. They concentrate on the
commissions you could earn just for recruiting new
distributors, and generally ignore the marketing and
selling of products or services.
Most states outlaw pyramiding. The reason: Plans that
pay commissions for recruiting new distributors
inevitably collapse when new distributors can't be
recruited. When a plan collapses, most people - except
perhaps those at the very top of the pyramid - lose their
money.
The Federal Trade Commission offers these tips to help
you avoid losing money to an illegal pyramid scheme or a
fraudulent multi-level marketing plan:
- Avoid any plan that offers commissions for
recruiting additional distributors.
- Beware of plans that ask new distributors to
spend money on high-priced inventory. These plans
can collapse quickly - and also may be illegal
pyramids in disguise.
- Be cautious of plans that claim you'll make money
through continued growth of your
"downline" - the commissions on sales
made by new distributors you recruit - instead of
through sales you make yourself.
- Beware of plans that promise enormous earnings or
claim to sell miracle products. Just because a
promoter of a plan makes a claim doesn't mean
it's true! Ask the plan's promoter to back up the
claims with hard evidence.
- Beware of shills - "decoy" references
that the promoter pays to describe fictional
success in earning money through the plan.
- Don't pay or sign any contracts in an
"opportunity meeting" or any other
high-pressure situation. Take your time to think
over a decision to join. Talk it over with your
spouse, an accountant, or a lawyer, or a
knowledgeable friend who isn't involved in the
business.
- Do your homework! Check with your local Better
Business Bureau and state Attorney General about
any plan you're considering, especially if the
claims about your potential earnings or the
product sound too good to be true.
For more information about get-rich-quick or self-employment schemes, contact:
Consumer Response Center
Federal Trade Commission
Washington, D.C. 20580
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