A pyramid scheme can take many forms, but it generally involves participants who pay money into the scheme (including by making an investment or paying for a product, service, or membership) and are offered the opportunity to make money by recruiting new participants. Pyramid schemes are illegal, and most people lose money in them. (Penal Code, § 327.)
Multi-level marketing generally involves participants who are offered the opportunity to sell something and to make money both from their own sales and from the sales of people they recruit. Multi-level marketing can be a legitimate business, but some are illegal pyramid schemes in disguise.
Sometimes it is difficult to tell whether an opportunity is a scam. Here are just a few danger signs to watch out for:
- The way to make money is based mainly on how many people you recruit, rather than how many products you sell to the public. For example, a business could give you hypothetical earnings “if you just introduce five people and they introduce five people,” or similar pitches.
- You are asked to “buy in” to join, pay to attend seminars, buy sales materials or a lot of inventory, or otherwise “invest” your money. While you may generally have to buy items to sell in a multi-level marketing program, it is a big red flag if the business has a no-return policy or charges large “restocking fees” or other fees. If the business accepts returns, get the return policy in writing. It is also a red flag if the business tells you that you don’t need to make any purchases but then pressures you to do so.
- Pressure to “join now”—be wary of companies that push you to sign up before you have time to carefully consider the opportunity on your own. Scammers often use carefully crafted talking points designed to get your excited about the opportunity and lower your guard. Take your time and research the business carefully before signing up.
- Any statement of approval by a government agency—government agencies do not approve or endorse companies or products.
- If it sounds too good to be true, it probably is.
Here are some other tips to keep in mind:
- Just because your friends and family are participating, don’t assume the opportunity is legitimate—they may not know that it is a scam.
- A celebrity participant or endorsement does not make a business legitimate!
- Be wary about products or services that may lose their value if the company disappears—for example, memberships or pre-paid cards.
- Do your homework about the business, and take your time to make a smart, well-informed decision. Ask lots of questions, consult other information sources, and get details about the business and its products. Take written materials and contracts home to review them carefully, and consult with trusted family or friends who are not part of the company.
Learn more about multi-level marketing and illegal pyramid schemes from the Federal Trade Commission and the Securities and Exchange Commission.
You may report an illegal pyramid scheme to the consumer protection division of your local district attorney’s office and to the California Attorney General.
