The Hallmarks of Pyramid Schemes, According to Attorneys
By now, someone has tried invited you to join a multi-level-marketing (“MLM”) business as a distributor. And let’s be honest, as a hard-working, self-motivated individual with a knack for sales, you may have been tempted. After all, some of your friends’ lives have been changed by legitimate MLM programs. You’ve seen stay-at-home parents supplement their family income and, sometimes, even become their household’s sole breadwinner.
But you’re still a bit skeptical. In an era of rampant ”fake news” and viral hoaxes, you seriously wonder whether certain direct-sale businesses are really illegal pyramid schemes masquerading as a legitimate MLM program. As attorneys, we get it. The truth is that the line between the two can be blurry. Familiarizing yourself with how a pyramid scheme works—and why it's unlawful— can help you make a wise decision as to the business opportunity you’ve been eying. So, let’s get right to it.
The main characteristic of a company operating a pyramid scheme is that more emphasis is placed on enrolling other participants than selling the actual product or service. The model typically relies on the participants to recruit members through social media, at home meetings and other means. Meanwhile, the company often goes to great lengths to make the program look like a business. New products are introduced that are overpriced, of poor quality, difficult to sell or of little value.
Pyramid schemes can be violative of the Florida Deceptive and Unfair Trade Practices Act (known as “FDUTPA”). The statute protects consumers from “… unconscionable, deceptive, or unfair acts or practices in the conduct of any trade or commerce. Rather than adopting the federal act, our state maintains its own consumer protection and enforcement law, which alight with federal regulations. If promises are made and not delivered, a claim may be brought under the statute. Other state and federal laws may also be implicated.
While there are many clues that a company may be operating a pyramid scheme, here are the hallmark signs according to consumer protection attorneys:
Revenue is generated primarily from recruiting new participants to join the company, not on the sales of products or services to consumers;
You’re required to pay high start-up costs and substantial hidden fees to become a participant;
You’re required to buy a significant amount of inventory;
You’re forced to buy other things you don’t want or need to stay in good standing with the company;
The company promises you the ability to make a lot of money with minimal effort; and
The company makes unsubstantiated claims of how many people have made a fortune.
If you’re in the market for a business opportunity or, don’t jump in based on advertising hype or unsubstantiated promises. Look for a quality program that rewards hard work and facilitates the sale of products or services. Make sure that you also:
Obtain and verify company information;
Find out the start-up costs and the expected return on investment;
Examine marketing material and sales plans;
Verify earnings of other participants in the company;
Review contract cancellation and product buy-back policies;
Talk to trusted people you know who have long been with the company.
Ruth is the founder of Jackson Lee | PA, a consumer law firm recognized for slaying the toughest legal issues. In addition to being an attorney and wife of one, she's a mom to four future world-changers. Drop Ruth a line at firstname.lastname@example.org.