Millions of Americans have lost money in pyramid schemes. A pyramid scheme can take many forms, but generally involves the promise of making money by recruiting new people. Pyramid schemes are illegal, and most people lose money.
Multi-level marketing programs, where participants sell products to the public and earn commissions both from their own sales and from the sales of the people they recruit, can be a legitimate business using a network of independent distributors to sell consumer products. However, not all multi-level marketing programs are legitimate. Some are illegal pyramid schemes in disguise. Be careful and ask questions before signing up.
If an opportunity has one or more of the following, it could be a pyramid scheme:
- You make money mainly based on how many people you recruit and the money they pay to join, instead of through sales of products to the public. This is the number one sign of a pyramid scheme.
- There is a lot of pressure to sign up immediately. Scammers often use very carefully crafted scripts designed to lower your guard and get you excited about the business. Do your homework and ask a lot of questions before investing. A good opportunity to invest in a legitimate business will not disappear overnight.
- You are required to “buy-in” to join, or you have to spend money attending seminars or buying sales materials, especially if most products are sold to other distributors rather than to the public.
- You are required to purchase expensive inventory or a lot of inventory. While you must generally purchase items in a legitimate multi-level marketing program, if the business has a no-return policy or charges large “restocking fees,” it is a big red flag. If the business accepts returns, get the policy in writing.
- Just because your family and friends are participating, don’t assume an opportunity is legitimate. They may not know the business is an illegal pyramid scheme.
- A celebrity endorsement or member does not make the business legitimate.
- If it sounds too good to be true, it probably is!
If you are considering buying into a multi-level marketing plan, ask a lot of questions and get details about the company and the products. Be careful about fraudulent marketing practices and potentially useless or unsafe products. Remember that your sponsor and others above your sponsor’s level will make money if you join—so take your time to make a smart, well-informed decision.
You may find additional information about pyramid schemes and multi-level marketing from the Federal Trade Commission, U.S. Postal Inspection Service, and Securities and Exchange Commission.
If you believe you were invited to join an illegal pyramid scheme, you may notify the consumer protection division of your local district attorney’s office, and file a complaint online with the Attorney General’s office by visiting https://oag.ca.gov/contact/consumer-complaint-against-business-or-company.