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.


  1. Someone’s plan for achieving something.
  2. 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.


mlm scams


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.

legitimate mlm vs mlm scam


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.

Income claims

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?

Tim Sales

About the Author

Tim Sales

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.

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Jackie Liddle

Well put! Well said! Well done!

Doug Lee

This is where the rubber meets the road. This article crushes the tired and most used objection of the pyramid scheme. I love the part about comparing the industries where money was lost.

Gavin B.

The network marketing model is attracting the attention of professionals and big business for it’s efficient distribution model. The message on this site addressing the “pyramid” issue is very timely. How unfortunate that society continues to let ignorance and apathy get in the way of proper fact finding, just as we do in our democratic processes (e.g., elections).

Rafael Lagado

Great write up. This is very helpful in educating prospects as it clarifies so many misconceptions right from the start.

Patti Roney

Thank you for comparing legal MLM and illegal pyramids, but also thank you for comparing the small percentage of illegal pyramid losses to the other financial dangers that are legal and prevalent! I’m so thankful for being involved in legal, profitable networking!!!

Billy Brandon

Awesome Article! This is the best explanation I have come across when addressing the “Pyramid” Question! Once Again you have used your ability to simplify and break down the facts which makes it easier for the average “Joe” to understand why Network Marketing is truly THE BEST BUSINESS IN THE WORLD!

Linda Dow

I loved this article. It’s so simple to understand and explain to others. Thank you, Tim Sales!

Jonathan Charles

Bravo, Tim, Bravo!

Steve Stearns

We all need to focus on educating how scams are not the same as an industry. Bad people create scams and they’ll use an industry as a tool. Thanks for making this simple for others to get.

Marti Gilchrist

What a great article! I have never seen this topic explained more clearly and completely. Thanks, Tim.

Dr Barry H

Wow. That should help people to get beyond the confusion caused by lack of knowledge.


This is a great article and most importantly it is very objectively done! Thank you.

Bill T.

Excellent, logical explanations that should help those that need to understand what MLM really is all about!!

Dee Austring (Aotearoa/NZ)

When you find a company who gives a 30-day, 100% money-back guarantee — even when the products have been returned empty — you know that’s a company who believes in their products.

Ros Bott

This is extremely clear and well-written. Well done! I once lost money myself on a pyramid scheme – now I’m in MLM I can say that this article is absolutely right. The two are totally different.

Larry Wood, Ind.

Fact is stranger than fiction. The legal system actually enables people to loose money, legally. Love the illustrations again!

Valencia Burton

This has got to be one of my favorite articles! Love the definitions!

Soomin Kim

Clarity. Thanks Tim.

Steve Pickles

An excellent article that explains more than I know after 7 years in the network marketing business. Well done Tim.

Gavin Chapman

Perhaps nothing is more of a scam than being paid what we do not truly deserve. Particularly if we are simply taking advantage of people and not making their lives better. In professional/FirstClass MLM we get paid exactly what we deserve – no more, and no less.

Shirley K., California

Your illustrations are priceless!!

Shirley K., California

Thanks for your down to earth descriptions.

Ayman Albritton

This article has now become a powerful tool for me to use when people say “is that like a pyramid?”. Both the inductive and deductive logic, the comparisons and contrasts between MLM…pyramids, scams..etc is truly helpful. The comparative figures of losses from different financial investments is great! Thank you for this input and this website. I truly hope it becomes at the top of any search engine.

Patty Jones

Thanks for all you have done. Knowledge changes the world.

Chris M

Great Information!! I think it’s easy for people to get confused about a legitimate compensation plan with multiple levels and a pyramid scheme IF THEY DON’T KNOW HOW TO IDENTIFY THE DIFFERENCE!! Perfect explanation, Tim.


Holy crap! Does anyone have any negative feedback? Didn’t he misspell a word, or something? U act like he wrote Shakespeare.

Donnie D.

Thanks Tim for the simple comparsions between the two terms.

Rolf Hefti

Very educational!


Thank you Tim for the insightful articles and information. There is a scripture that says “My people are destroyed for a lack of knowledge”. This is ever so true in this industry.

Everyday people are passing up legitimate opportunities to make differences in their lives and the lives of others simply because they have been conditioned in a certain way of thinking.

It is really frustrating for people like me who really do have a pure heart and honestly want to make a difference in the lives of others. Not everyone is out just to make a buck.

I can see you have put a lot of time, thought and research in creating this resource to get the unbiased truth out and I truly believe you will be blessed for it.

Unfortunately, there will always be that certain breed of people in this world that will find fault in everything and also like to tear other people down rather than build them up.

In one sense I feel sorry for these types of people because it is very true that you do reap what you sow and they will never have the chance to truly experience what life really has to offer in any area.

Bruce Fontecchio

People need to know the differance , I’ve had that stigma for a long time.
Thank you,
Time to go to work,
Bruce Fontecchio

Jeff Cross

This article shows the power of research instead of a quick glance and an assumption. To understand a subject, in-depth research is vital. Thank you for making this so clear.

Frankie Tse

I simply forwarded this to people I know who are skeptical about multi-level network marketing. So they can rest assured they are not in association with someone operating an “ugly business”. God blessed I shouldn’t describe their inner perspective of MLM as such, agreed?!

Madam Onnie

Reading this article was like taking a breath of fresh air! I never knew how to accurately explain to someone the difference between a pyramid and MLM! This article has made the way clear. Tim, you are to be commended on an article well done!

G. Hotep

Thanx soooooooo much for this very enlightening article! I have a Network Marketing business and when telling others about the business, the 1st question that come up is the “pyramid scheme” and the legitimacy of MLM or Network Marketing. You laid the info out so clearly, even a kid can understand!! Thanx and God bless you!!


Excellent article! Thank you so much! I often get the “pyramid scheme” questions & I can now answer them better.

Anthony Sas

Excellent article. I also have had people tell me that a involved in a pyramid scheme and, have been able to answer it to certain level but they still go away with the conception that I am involved in one of “those schemes”. Now I have more firepower to give them that should change their thinking perhaps.

Anthony Sas

R. D. Sailor

I can now direct someone to a genuine “meat & potatoes” description of what it is that we do and what we DON’T do, and how they can evaluate our excellent MLM opportunity vs. those that offer “empty promises.” Terrific information to be able to give out to those “non-believers!”

caroline b. miller

makes sense to me…but you know these days most people want big money real it’s easier to scam people than to try and use real brain power and come up with a honest legit system that is easy to understand and easy to implement..


Excellent article.


Your narrations are very useful and people who works more and invest in this area of business would get a better feedback and more practical ideas from your comments.
Thanks and regards,

Ben Mitchell

Excellent article. Well researched and well said. Thank you.

Emma Reyes

I FREAKING LOVE THIS GUY!!! SO AWESOME! Listen to Brilliant Compensation, its the best!

Dave Thompson, Nashville, TN


I just have to say that to us network marketers, this is WAY better than Shakespeare and a whole lot more profitable too! Shakespeare is great to read but it won’t help you succeed in network marketing like these articles will! And we don’t find fault just to be finding it either!

Dave Thompson
Nashville, TN

Kim C

A very simple, honest explanation of the difference between MLM and pyramid sales. I always wondered the best way to explain it to others. I am just going to refer them to this website and save my breath!

Philip C. East Bay, California

Absolutely brilliant. I couldn’t have put it better myself.
Can’t wait to see you soon. 🙂

Dioscoro P.

Informative, educational

Jolana J, Czech

It is a wonderfull work – THANKS YOU! – with all my co-workers
easy a everybody can understand. WOW:)


get detail about mlm thanks


The best I have ever read! Thanks for putting in all the examples.




Yes the product makes the MLM legal.
But it has the same structure.
Do you know what the real problem is with pyramid schemes?
It is that they run out of new possible recruits. If they never ran out of recruits, there would be no problem, because everyone would get their money.
But hey… doesn’t this mean MLM businesses also run out of recruits?

Toni Roberts, Bay Minette, Alabama

Well worth the read….even at 2 am in the morning!!! Thank you Tim.

Jose Garza

Well put. MLM is not a scam, but a scam can appear to be MLM. The definition isn’t cut and dry though. Some pyramids
these days put up quite an elaborate front, but for “direct sales” when the don’t make their own products, there’s your sign.
When we can get 400-1000 sales every 3-4 years minimum we have a smooth, profitable system, while a scheme may use an overpriced product to pull money through the legs. You know it’s losing system when they have no customers except themselves.
Key points: If your team is moving product all day every day and someone wants to join based on your actions, you’re in an MLM. If you’re goal is to recruit 50 or 1000 people using misleading statements then you’re in something fake that will drain your wallet and waste your time. Dishonesty quietly fuels failure. MLM is all about creating those chains of product movers, not a pyramid of mostly internal sales.

Kate A.

You know, I had the “pyramid scheme” question once and have no defense, don’t need it, but here’s the deal. My financial records speak volumes and everyone has them. Keep those organized. If I were so inclined to recruit another downline they’ll have seen at least the last 2 years 1040’s, itemized deductions, paychecks no matter how small or large, 2 years of T&S to give them the best picture of what they’re getting into. I explain what happened every month to get where I am now plus well, I like to help with taxes and help them avoid my pitfalls. And they can go to anyone in the company and get the same information. Please do!

As Tim says, schemes will have more downlines than customers and educate themselves with an arsenal of pyramid retorts (some stolen from Tim) and mind games because that’s their bread & butter but they have no track record. Oh and I think they cold approach recruit mostly (yes, seriously) so that makes sense.

The point I’m trying to make is if they don’t like pyramid shaped whatever they weren’t meant for it. If you need to defend your ego, get over it. A first class MLM focuses on a satisfied customer base which then creates a reputation that spreads like a virus so your community has no question, only desire.

Wade Balsdon

This is the finest explanation to this age old debate that I have ever read. Well done 🙂


Great job Tim!!!

Brenda Howard

Finally, an explanation in print that I can show prospects! Thank you very much!


Great article! I often have to explain misperceptions on MLM.

Pradeep singh

I am fully agree with Brenda Howard,It’s true explanation of MLM which is a must show print to the prospects ! thanks for such a fare and correct information.


how can you determine exactly if it is a pyramid scam or a MLM? For example what if the company disguised itself as a legitimate company has a permit from the government.We are selling health and wellness product if we become a member we have a 50 % discount then when we invite people we recieve additional cash.. for inviting or recruiting people in buying the product. if they buy the packagae they become members do you think it is A PYRAMID SCAM OR just a MLM still concentrating in inviting people please answer my question through my e mail I am involved in MLM and I really dont know if it is a real legitimate MLM company or a scam

James Robertson

I’m happy that the truth is being spread about ponzi schemes and such. As I scan the internet It seems that there are more scams and schemes than there are legitimate opportunities. It pays to do our due diligence before joining. Case in point. The recent shutdown of FHTM by the FTC crushed a lot of people after being in a seemingly legal business for years, but if they had known this info then they would have never joined in the first place

Servias Mazhetese

This is very helpful, especially to those who are new to the industry.


I was wondering if i could grap someones option on a company called ACN and if weather they knew or have proof of this being a legit bussiness or is a scam. I question this because how can a third party get the same service as a direct buyer pr customer, when you are a person or company it would usally cost you money so how they pro-claim they can get it cheaper and at a better rate and it be the same quility really doesnt sit right.
So if someone could emile me or reply to this it would be really helpful and may save me money and time i could be using to invest in a actual money making MLM
Thank you

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