How to Tell if Something Amounts to an Illegal Pyramid Plan rather than a More Legitimate Multi-Level Marketing or other Legitimate Plan?

    On the internet and in opportunity magazines, many different forms of business have come and gone that can generally be termed "matrix" or "rewards sites." They offer a product at a very low price, with the catch that you pay the low price now and then get put on a list to get the product later, after enough people pay the same price as you after you paid. Then, they use the money that others put up after you to get you the product at the very low price you paid. These people who signed up or paid the low price for the product after you did are similarly going to receive their product when enough people sign up after them. In order to detract from this negative aspect of the plan, you agree that what you are actually buying for the low price is an ebook or set of ebooks, and that as an added bonus you are being put on the list for the "free gift," which is the low priced product that was offered. For instance, the "free gift" might be an MP3 song player worth $50.00, and you are told you can get it for $10.00 as a gift after you "join" by purchasing a set of ebooks. Several people will have to sign up after you do, first. In a variation on this theme, some sites state that you are to refer a given number of people after you buy your ebooks for $10.00, and after they have all bought ebooks for $10.00, you will receive your gift. For instance, you may need to refer 10 people who buy ebooks at $10.00 each, total gross income to seller-website being $10.00 from you plus $100.00 from your ten referrals = $110.00 gross, and then they send you your MP3 player worth $50.00. Technically, you have only paid $10.00 for it. Besides, each of the 10 people you referred also has the right to the same "free gift" after they have in turn referred 10 people each.

The FTC has published a free brochure, "Profits in Pyramid Schemes? Don't Bank On It," that warns that consumers should:

• Avoid any plan that offers commissions for recruiting additional distributors;
• Beware of plans that ask new distributors to spend money on high-price inventory;
• Be cautious of plans that claim you'll make money through continued growth of your 'down-line' recruits, instead of sales;
• Beware of plans that promise enormous earnings or claim to sell miracle products;
• Beware of shills - decoy references used to promote the plans.

    How do you distinguish an "illegal pyramid scheme" from a legitimate MLM (Multi-Level Marketing) program such as Tupperware sales? In "The Bottom Line About Multilevel Marketing Plans" found on the above FTC website, the FTC explains:

"Multilevel or "network" marketing plans are a way of selling goods or services through distributors. These plans typically promise that if you sign up as a distributor, you'll receive commissions - for your sales and those of the people you recruit to become distributors. These recruits sometimes are referred to as your "downline."

"Some multilevel marketing plans are legitimate. However, others are illegal pyramid schemes. In pyramids, commissions are based on the number of distributors recruited. Most of the product sales are made to these distributors - not to consumers in general. The underlying goods and services, which vary from vitamins to car leases, serve only to make the schemes look legitimate."

    If it's so hard to tell what is an illegal pyramid scheme versus a legitimate MLM program, you are not the only one who wonders. Many people join pyramids in the belief that they're actually joining a multilevel marketing plan. Legitimate multilevel marketing plans offer a product or service that's sold to the public through a tiered network of distributors. However, many multilevel marketing plans are actually pyramids. If they offer a product or service, it's only to make the program look legitimate. And if any sales are made, they're generally only to new distributors - not to the public-at-large. In pyramids, the emphasis is on recruitment, and most, if not all, of the sales are to distributors. Again, it seems to come down to FMV (Fair Market Value) of the product offered. No, products do not need to be offered at rock-bottom prices to be offered "legitimately." But where a product is offered at vastly above anything like FMV and future sales of the extremely-inflated product are required to gain the future "prize" or commission, the business plan is more likely to be determined to be an illegal pyramid scheme rather than a legitimate marketing opportunity.

    Thus, it appears that the MLM plan will be deemed less legitimate if most product sales are to distributors rather than to consumers in general, and if the underlying goods or services are shams, designed only to make the "schemes" look more legitimate. If a buyer is required to recruit new participants in order to get anything, that makes it less legitimate than if the buyer qualifies for something right away, and if the "product" initially bought by the buyer is bought at close to a fair market value (FMV) that is more legitimate than if it is sold at a highly-inflated price and a "prize" or "free gift" is available only after many more "buyers" have been referred to the site and have similarly bought. The track record of the company would make a difference in whether it was likely that subsequent buyers would obtain anything, and probably relevant to the long term survivability of the MLM plan would be the answer to questions as to what happens to the money after the product is bought. Does the company use the money right away to meet it's current expenses such as advertising for more future buyers, or to meet expenses of the owners or salaries of the officers, etc., or is some share of the money proportionate to the value of future awards put away in trust for those who have not yet received their prizes or commissions?

    Under the section captioned "Your Responsibilities," the FTC advises, "If you decide to become a distributor, you are legally responsible for the claims you make about the company, its product and the business opportunities it offers. That applies even if you're repeating claims you read in a company brochure or advertising flyer." Further, "if you solicit new distributors, you are responsible for the claims you make about a distributor's earnings potential. Be sure to represent the opportunity honestly and avoid making unrealistic promises. If those promises fall through, remember that you could be held liable."

    When evaluating a multilevel marketing opportunity, consider these tips as you make your decision:

1. Avoid any plan that includes commissions for recruiting additional distributors. It may be an illegal pyramid. Not necessarily, but it may be. That could be the case whether the commissions are in the form of future gifts, money, or current commissions.
2. Beware of plans that ask new distributors to purchase expensive products and marketing materials. These plans may be pyramids in disguise. Not necessarily, but could be. A lot depends on a subjective measure, hard to quantify but which a judge or jury could decide one way or the other, as to whether the cost of the products and marketing materials bears some reasonable relation to their fair market value.
3. Be cautious of plans that claim you will make money through continued growth of your down-line, that is, the number of distributors you recruit.
4. Beware of plans that claim to sell miracle products or promise enormous earnings. Ask the promoter to substantiate claims.
5. Beware of shills - "decoy" references paid by a plan's promoter to lie about their earnings through the plan. They may not be rich enough to use famous TV actors as "decoys" or shills, but if they use anyone at all to extol the virtues of the plan and that person is actually paid and did not really participate in the plan, that would be a warning sign that you may not be buying something that will ever help you.
6. Don't pay or sign any contracts in an "opportunity meeting" or any other pressure-filled situation. Insist on taking your time to think over your decision. Talk it over with a family member, friend, accountant or lawyer. Thus, when you are offered "free tickets" to high-pressure events, resist any temptation to sign up on the spot at these high-pressure events.
7. Do your homework! Check with your local Better Business Bureau and state Attorney General about any plan you're considering - especially when the claims about the product or your potential earnings seem too good to be true. Anything that seems too good to be true probably is not true.
8. Remember that no matter how good a product and how solid a multilevel marketing plan may be, you'll need to invest sweat equity as well as dollars for your investment to pay off. Any site or business opportunity that makes it sound like you will have virtually no work at all to do in order to receive your pay-off is "fishy," to say the least.

    When might the idea be wrongful instead of just "rightful," such as Amway or Tupperware? How do you tell? You don't want to violate some criminal or civil fraud law, and you want to do business.

• States have specific rules on businesses that are selling "business opportunities," i.e., the right to do business. The rules may cover only transactions over a certain amount, or they may be more broad than that, but they generally cover on those "business opportunities" where the seller says they'll help the buyer find accounts or purchasers, claim the buyer will make a profit, claim the seller will provide a marketing plan, or claim the seller will refund all or part of the purchase price if the buyer becomes dissatisfied. 

• As stated above, a valid MLM pays commissions for the retail sales of goods or services, not for recruiting new distributors. Pyramid schemes allow for payment based upon recruitment, alone. The recruited person gets nothing unless and until a certain number of new distributors are recruited. Thus, the emphasis should be on product rather than recruitment and the recruit should be able to earn money or commissions on each of his or her new recruits (downline folk) right away, not having to wait until he gets a certain number of new recruits.

Example: Suppose a pyramid scheme is set up by John Doe who brings in ten friends on the "tier" below him. Each of these ten friends has to bring in ten new recruits to make any money at all. At each level, the new recruit must bring in ten more individuals in the hope of making any money for themselves, while John Doe kicks back and relaxes as the frenzy starts. By the time we have reached the third "tier" of the pyramid, there are 1,000 people vying for recruits. Suppose those 1,000 people all make their ten-recruit quota. There are now 10,000 people in the pyramid, competing with each other. How would this scheme ever work in a small town of 15,000 inhabitants? How would it work in a larger town with a population of 150,000 when at the next tier there could potentially be 100,000 participants in the plan? And just imagine this. At the next level, there would be 1 million participants.

• Registration of the MLM company with many disclosures may be required in the state, with such a disclosure being given to each buyer of the business opportunity. Some states require a bond be posted.
• An example of a strict interpretation is Minnesota Revised Statutes 325F.69, "unlawful practices," where any form of undefined misleading or deceptive practice is said to be "enjoinable," meaning a court may issue an order to stop it. Specifically, among other things, under "referral and chain referral selling prohibited," a seller may not "give or offer a rebate or discount or otherwise pay or offer to pay value to the buyer" anything for buyer's referral of "the names of prospective purchasers" or for helping the seller make further sales, "if the earning of the rebate, discount or other value is contingent upon the occurrence of an event subsequent to the time the buyer or lessee agrees to buy or lease." (Subd. 2). In addition, the seller may not sell goods with an inducement to give more to the buyer for getting more participants in the plan, "including such plans known as chain referrals, pyramid sales, or multilevel sales distributorships," other than payments based on further retail sales to people "who are not purchasing in order to participate in the prohibited plan or operation." If this is violated, not only are any agreements unenforceable by the seller and subject to being reimbursed to the buyers, but the person in violation "shall be guilty of a gross misdemeanor." It is hard to tell under the above just how it is that Tupperware and Amway avoid being in violation while some others may end up in violation. Perhaps it is just that what one gets in Tupperware or Amway for finding further participants in the sales organization or "dealers" is a share of their commissions, and one does not get something just for the obtaining of a new participant.

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