Steve Weisman is a lawyer, college professor, author, and one of the country’s leading experts in cybersecurity, identity theft, and scams. See Steve’s other Con Watch articles.
According to the Direct Selling Association, a trade organization for the direct-to-consumer sales industry, consumers bought $42.7 billion of multi-level marketing products, which commonly include home care, nutrition, and beauty products.
Direct selling organizations such as Mary Kay Cosmetics and Amway are legitimate businesses that can potentially be profitable for the people who sell these products. Pyramid schemes, on the other hand, may resemble legitimate multi-level marketing businesses, but are in fact illegal and likely to result in you losing money.
Mushrooms are filled with healthy vitamins and other important nutrients. Toadstools are poisonous. So how do you know the difference? An old joke says that all you have to do is eat the mushroom; if you die, it was a toadstool.
So how do you tell the difference between a multi-level marketing opportunity mushroom and a pyramid scheme toadstool without eating it to find out?
Pyramid schemes are disguised as legitimate businesses; however, if these companies’ primary source of profit comes from enrolling new members who pay fees to join, then beware. The only profit for investors comes from bringing more people into the scheme. In other words, the only way you can make a profit is by becoming a scammer yourself. Like chain letters, pyramid schemes are doomed to failure because eventually you run out of people to sustain the growth of the pyramid.
As with many scams, in some ways pyramid schemes resemble how direct sales companies operate. A key difference is that while there may be instances where the fraudulent companies sell actual products to make the enterprise appear legitimate, they profit only from signing up new people to participate in the scheme.
In 2020 the Federal Trade Commission sued “Success by Health” and its executives, alleging that the company operated an illegal pyramid scheme through which its distributors made money primarily by recruiting new distributors rather than through selling the company’s products.
“Success by Health” executives told prospective distributors that they could earn more than a million dollars per month, but in order to do so they would have to recruit more than 100,000 affiliates working under them to achieve that level of profit. According to the FTC, “Success by Health” cheated their victims out of more than $7 million.
A little common sense can go a long way in avoiding pyramid schemes.
- Does the company actually sell products and make substantial profits through product sales instead of recruiting of new members? If it is primarily through recruitment, it is most likely a pyramid scheme.
- Don’t trust endorsements from the IRS or the FTC that appear to support the legitimacy of the company. Neither the IRS nor FTC ever issues such endorsements. If the operator of the business provides such a document to you, you can be sure that it is a scam.
- If you are considering investing in what is represented to be a direct selling organization, always investigate the company and the terms of investment carefully before handing over any money. Look for lawsuits and complaints. You can check out the company with the FTC and your state’s attorney general.
- Ask your accountant or lawyer to review the organization’s business model and terms.
- Don’t pay upfront fees to participate in a multi-level marketing company.
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