Pyramid schemes have been illegal in the U.S. for a long time—and not only are they illegal, but 99% of people who join them lose money.
These schemes are nothing new, but the rise of social media and the power of rebranding that comes with it has given them a new platform and access to young people. Changes are, at some point you’ve received a message on Facebook of Instagram trying to sell you printing yoga pants or essential oils—and you may even know someone working for a multilevel marketing company. And with apps like venom, it has become even easier for these schemes to spread quickly and without much a paper trial.
The idea behind multi-level marketing plans, which operate a bit like pyramid schemes, but aren’t illegal, is that salespeople recruit more salespeople, along with selling their wares so that they get a cut of a company’s profit as well as percentage of their recruit’s sales.
Pyramid schemes have a similar structure but focus on recruitment first. Recruits can be charged a membership fee and usually have to pay for sales training and products before selling to customers. Recruits then must make the money they used buying the products back by selling more products and recruiting more salespeople, all while the company takes a percentage of every recruits’ fees and sales.
According to the Federal Trade Commission, a business is considered an MLM is revenue is based on selling products to the public. But is a company’s income is based on the number of people it recruits and how much inventory is sells to them, that’s a pyramid scheme. So if you’re thinking of joining a multi-level venture, there should be little to no fee to join the company. Also check if there is a buy-back policy that allows independent contractors to return unsold inventory. Companies should also be providing free training for you, as opposed to charging you for it. If they aren’t, you may be part of a scheme.