Beware of Illegal Pyramid Schemes

Business opportunities are offered in various formats. One is the Multilevel Marketing (“MLM”) business model. Many legitimate companies in the MLM industry lawfully charge low fees to distributors for the right to sell the company’s products, offer refunds on resalable inventory and their distributors actually derive income from the retail sale of products to end-users. However, some illegitimate companies operate pyramid schemes in which a distributor earns income earned not from the retail sale of goods or services but, rather, from “participation fees” – a portion of the entry fees paid by new people joining the system recruited by the distributor or its sub-distributors. Such schemes depend upon the endless recruitment of increasingly larger numbers of distributors to generate entry fees sufficient to pay all upper levels of entitled participants, until the scheme collapses under its own weight.

The Federal Trade Commission (“FTC”) has found that pyramid schemes are illegal deceptive and unfair trade practices which violate Section 5 of the Federal Trade Commission Act, 15 U.S.C. 45(a)(1).[1] The FTC has observed that “modern pyramid schemes display endless ingenuity in finding ways to disguise payment of participation fees to appear as if they are for the sale of goods or services”, and that differentiating legitimate MLM companies from illegal pyramid schemes requires a case by case fact intensive examination of the sources of income.[2]

Before investing any money in an MLM, you should fully investigate any earnings claims made to you. Understand the exact sources of any income you expect to earn. Speak with the FTC and your state and local consumer protection agencies to determine whether complaints have been made against the MLM which you may be considering. If possible, talk with people who have dropped out of a particular MLM system to determine why they did so. Be mindful of the age-old warning: “All that glitters is not gold.” [3]

[1]  73 Fed. Reg. 16112 (March 26, 2008) (Business Opportunity Rule Revised Notice of Rule-making)
[2]  Id., at 16119.
[3]  William Shakespeare, The Merchant of Venice

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