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Millions of Americans have lost money participating in pyramid schemes which are also known as "endless chains" - - because they cannot work unless the chain is endless and, of course, it cannot really be endless because at some point there are no more people willing to join the scheme. While there are legitimate multi-level or network marketing companies, many of them are illegal pyramids or gifting clubs. They are often portrayed as business opportunities, and victims who thought they were paying start up costs to buy a small business of their own eventually find they have lost money or are responsible for others losing money.
An "endless chain" or an unlawful pyramid is a plan in which a person pays money or buys merchandise for the chance to receive money when additional participants are introduced into the scheme. For example, Mr. Washington pays $3,000 for cosmetics. He recruits Mr. Jefferson who also pays $3,000 for cosmetics, in order to have the opportunity to recruit others. Mr. Washington gets a commission of $500 from Mr. Jefferson's $3,000 purchase. Mr. Jefferson recruits Dolly Madison who also pays $3,000 for cosmetics. From this, Mr. Jefferson gets $500 and Mr. Washington gets $200. Because there is no legitimate retail sale to an end user on which to base the distribution of the commissions, it is an unlawful pyramid.
It is sometimes difficult to tell the difference between a pyramid scheme and normal multi level marketing program. Multi level marketing can be a lawful business which uses a network of independent distributors to sell consumer products. The difference between a pyramid scheme and a legitimate multi level marketing plan is that in the latter, money is only made through the eventual retail sale of a product to an end user. It is unlawful if Mr. Washington and Mr. Jefferson obtain commissions by selling the cosmetics to another distributor, who is buying the cosmetics not for their personal use, but merely to recruit others into joining the scheme.
There are thousands of variations of unlawful pyramids. Pyramid promoters are masters of group psychology. Often unlawful pyramids are pitched at recruitment meetings which create a frenzied, enthusiastic atmosphere where group pressure and promises of easy money prey upon the potential victim's rational mind and fear of missing a good deal. Promoters also openly discourage thoughtful consideration and questioning of the scheme. Victims often find themselves tricked into participating.
In order for everyone in a pyramid scheme to profit, there would have to be a never ending supply of new participants. Often the new recruits are a participant's friends and family. In reality each new level of participants has less chance of recruiting others and a greater chance of losing money. The pyramid may collapse at any time. This places the participant in the position of victimizing his or her own friends and family.
To avoid becoming both a victim and simultaneously violating the law, do not let anyone rush you into making hasty and unwise decisions. A good opportunity to build a business in a multi level structure will not disappear over night. Take time to consider your investment before signing anything or giving someone your money.
Ask questions about the company and its officers, the products, their cost, fair market value, source of supply and the potential for sales of the supposed products in your area. Ask about start up fees, required purchases and about the company's policy regarding the buy back of required purchases. Inquire about the average earnings of active distributors, but be wary if the incomes cited sound to good to be true. Also, be aware that those who promote pyramid schemes may be charged with a felony.