Pyramid Schemes and Scams…
What are they and what do they have to do with MLM?
To be able to determine whether MLM (or a specific MLM company) is or is not a pyramid, scam, Ponzi scheme, or chain letter, you will need to understand each of them. Only then can you differentiate between them.
When my son was young I would point out a car and say the word “car.” He soon picked it up and would point to a car and say, “Car.” Then he pointed to a bus and said, “Car.” I said, “No, bus.” He didn’t believe me. Why? Because he had assumed that a bus “looked” like a car – therefore it was a car. Specifically, anything that moved on wheels was, in his mind, a car!
To solve this, I found a bus and a car that were parked side by side and pointed out those things that make them different from each other and those things that make them like each other. Only then could my son determine if what he was looking at was a car or a bus. If someone cannot see how things are different and how things are alike, they are dumb on that subject.
What I’ve just described is how the media (and many people) have confused the world about MLM and pyramids – because they can’t differentiate between them. They have lumped them into the same category, evidently thinking that anything that pays on multiple levels must be a pyramid. If that were true, franchising would be a pyramid.
Let’s start with a couple of definitions, since many people do not really know correct definitions to these words.
- Someone’s plan for achieving something.
- A secret or devious plan.
Scheme comes from Latin word schema, which means figure. Therefore, a scheme can mean either a plan for something good or something devious.
A fraudulent scheme.
Fraudulent comes from the Latin word fraud, which means deceit. Deceiving someone means to trick them.
FACT: There is no industry (including stocks, charities, legal, medical, religion, MLM and government) that does not have a history of fraudulent activities. Fraudulent activities of some people in an industry does NOT constitute a fraudulent industry.
In looking at scams, it is important to locate the actual source that is carrying out the scam; there is ALWAYS at least ONE person.
One that causes, creates, or initiates; a maker.
If a person kills someone with a rock, don’t blame the rock! The rock isn’t the source and didn’t kill the person. A person with bad intention is the source and USED a rock to do damage.
If a scammer uses telemarketing to seduce its victims into a scam, don’t blame the telephone. The scammer (a person) is the source and USED a telephone to deploy his scam.
If a scammer (a person) uses MLM to deploy his scam, don’t blame MLM.
An industry can’t be a scam as it’s not capable of tricking people. People are the only ones capable of tricking people.
MLM is not the culprit in scams, pyramids, investment fraud, chain letters or Ponzi schemes. The culprit is the unethical activities of a person or a group of people.
The reason scams sometimes use MLM is because MLM is a powerful way to distribute anything. Just as a telephone or the Internet is a powerful way to reach people.
1. Being unable to think with clarity or act with understanding and intelligence.
2. Lacking logical order or sense.
The government and the media have done a fantastic job of confusing people on the subject of pyramids and their association to MLM. The government (FTC – Federal Trade Commission) has publicly sued companies for running an illegal pyramid scheme and announced it to media; then the media has announced it to the public with very accusative statements like, “(Name of company) is an illegal pyramid scheme – ACTION IMMINENT!”
Then, after researching the company, the government drops the case because of no wrongdoing. But the media doesn’t announce this – therefore the public continues to think that a particular company is a pyramid scheme when it’s not. Pretty soon people just generally think that all MLM companies are pyramids when they are not.
This is the primary reason for the “controversy” around MLM. The controversy comes from people being confused on what is a legal and ethical MLM business and what is a pyramid. I will remove the confusion below.
The ability to perceive things in their actual comparative importance.
How “fraudulent” is one industry compared to another industry? To try and calculate this you’d have to ask the question, “What is the damage done by the fraud?” In the case of pyramids it would be loss of money. So in order to quantify how fraudulent one industry is, you’d have to compare it to another or other industries where people lose money. A news reporter can claim, “People have lost millions of dollars in these pyramid schemes.” Is
that a lot? Compared to what?
NOTE: I am not discussing MLM here, I’m discussing illegal pyramids.
In the US during the 2000’s, I was able to find:
- TC vs. BigSmart – $5 million
- Gifting Clubs – $16 million
- Professional Resource Systems – $13 million
- FTC vs. Skybiz – $20 million
That totals about $54 million.
Is that bad? If so, how bad? Let’s compare it to some other “losses.”
The largest financial losses to mankind in the 21st century (and throughout history) have been in the US stock market.
The stock market lost 9 TRILLON dollars of people’s money (January 2001 to October 2002)!
Seattle Times reported that, “According to Census Bureau statistics, the number of older Americans in the workforce grew by as much as 50 percent between 1980 and 2002. These older workers are seeking career changes, such as opening small businesses, and others are returning to work after huge stock market losses reduced their retirement funds.”
Even though the losses are well known and documented, the government continues to let the stock exchanges do business. If the FTC’s stated purpose is to protect people against deceptive business practices that cause financial loss of their money, why, oh, why would they be focused on pyramids when the stock market in ONE DAY lost $663 billion dollars (October 27, 1997) of Mom and Pops’ life savings? How can that business be allowed to stay in operation? I do not have an axe to grind with the stock market. I’m bringing this up as an example of perspective. Intelligent people can and DO put things in perspective by comparing them.
When you compare the losses in the stock market, lotteries, and gambling to the losses caused by pyramids, it is clear that pyramids do not cause nearly the amount of damage as other industries. In 2003, the average household in the U.S. spent $372 on state lottery tickets – that’s 42 billion dollars in losses (not counting the handful that won). Americans “legally” gambled more than 1.1 trillion dollars (2006). Put a trillion into perspective.
I am by no means advocating or defending pyramids! I want all scams and unethical business practices stopped. Period. One of the main reasons for this web site is to educate people about how to tell the difference between MLM and pyramids so they never get involved in a pyramid or an MLM that is doing business in an illegal or unethical way. My comments above merely suggest that if people (government, media, anti-MLM people) are going to scream fraud, then they should put the fraud into proper perspective of what’s causing the most financial damage. To do otherwise clearly demonstrates stupidity on the subject, or personal bias.
Illegal Pyramid Scheme
There’s a lot of “talk” about pyramid schemes. A pyramid scheme is different than an MLM company.
A pyramid is an illegal business that involves the exchange of money primarily for enrolling other people into the scheme, usually without any product or service being delivered. Sometimes there may be the appearance of a product, but it’s only there to make the pyramid look like a real business. Few people outside of the pyramid desire the product.
If you enrolled me into your “business” and I paid $300 to join BUT THERE WAS NO VALUABLE PRODUCT EXCHANGED, it could be an illegal pyramid.
This does not mean that MLM is an illegal pyramid because people enroll others into a business. The fine line between legal MLM and illegal pyramid scheme (according to the FTC) is the exchange of a “real” product.
By contrast, if you enrolled me and I bought $300 worth of products to see if I liked them and wanted to do the business, then that is NOT an illegal pyramid – as long as the product is a “real” product and not some gimmicky product. The best test is, when you use the products, do you like them? If you wouldn’t buy and use the products if you were not in the business, then don’t be in that business!
Most legitimate MLM companies give a thirty-day 100% refund on products if you don’t like them. If you join the business and buy inventory to sell and then change your mind, most MLM companies will give you back 90% of the purchased price on unopened products. This is rare compared to ANY industry that I’m aware of. If I buy a tire store and buy inventory and then change my mind, I am stuck with a bunch of tires! 🙂
Legitimate MLM company taking part in illegal or unethical activities
There are times when the above is done correctly by the MLM company, but the distributors are participating in illegal or unethical activities.
In a few of the court transcriptions I’ve read from companies being sued for operating as pyramids, the FTC (Federal Trade Commission) puts a lot of focus (in the court room as well as in their investigation) on the following two activities: income claims and not getting customers.
An income claim is enticing someone into the business by promising them that they can make a lot of money. The FTC puts even more emphasis on this when the enticement suggests that big money or life-long income can be attained easily.
Personally, I’m not in agreement with this as a “legal” issue, as it’s not consistent with what one sees on stock-trading promotions, lottery advertisements or walking into a casino. They are all full of “income claims.” It’s also not consistent with a regular job interview. If I walk into a company wanting a sales job, I would ask about the salary, commission, and how much money the top producer is making.
The legal issue aside, and speaking purely from an ethical view, I don’t feel that enticing people into a business by promising them easy big money is honest, nor is it ethical or professional. It’s also not very effective! Being honest IS effective.
Please note that distributors making income claims does not make an MLM company an illegal pyramid scheme! Remember, an illegal pyramid is when distributors are signing people up and not exchanging a valuable product. But earning claims can get you and your MLM company investigated by the FTC, which normally results in a fine and bad press.
Not getting customers
Something else the FTC looks at closely is whether the distributors in an MLM company are getting customers. If the distributors are focused on “signing people up” without a focus of getting customers, the company could get investigated. If this activity is out of control, it could result in the FTC suing the company for running an illegal pyramid. Make sure you read Wholesale Buying Organization versus Retail Sales Organization.
Here’s an Example of a Pyramid That Used MLM:
Skybiz (a business claiming to be MLM that sold e-commerce web sites) was later determined to be a pyramid scheme. According to the FTC, Skybiz was “focused on the huge sums of money that could be made by recruiting additional participants. Participants were urged to invest in more than one “Web Pak” to maximize their earning potential.”
To summarize the pyramid section, if someone contacts you trying to get you into an MLM business and you want to find out if the business is a pyramid, here’s what you do:
First, don’t assume that what the person is showing you is a pyramid or a scam. Also, don’t assume it’s a good business. Be neutral. Keep reading this site, and you’ll be able to properly evaluate the company. The link below should greatly help.
Also, keep this in mind: I’m truly indebted to the person who showed me my MLM business. No one could have given me a better gift.
Second, read this page: Isn’t MLM a Pyramid Because Of its Shape?
About the Author
Tim’s experience in building his own downline of 56,000 network marketers helped him develop his signature training series. A public relations ambassador for the network marketing industry, Tim has also dedicated his time to debunking the false information spread about the network marketing industry.