You may have read our article covering Primerica under investigation or Dave Ramsey’s thoughts on Primerica. I thought it would be beneficial to provide an article to help folks understand differences between MLMs and pyramid schemes.
People have joined pyramid schemes, not knowing that it’s a multi-level marketing program. And people have also joined multi-level marketing programs suspecting that it’s a pyramid scheme. This mismatch is due to the similarities that exist between the two systems. In this article, we’ll appropriately elucidate on the differences between the two platforms:
Legal Differences between MLM and Pyramid Scheme
Legal Meaning of Multilevel Marketing
As defined by uslegal.com, multi-level marketing is a system whereby a company contracts some persons to help sell a product. The term “multi-level” is used because contractors can invite others to work and earn performance-based income. The sales representatives get incentives to increase their sales force and get some commission on the purchases of their recruits.
Strictly speaking, Multi-level marketing is a form of direct sales and not marketing itself. The individual that’s recruited by the company to purchase a product is paid commissions. If such an individual recruits another marketer, the second layer is regarded as a downline. Such individuals get a cut on the sales made by such downline; this commission is referred to as an “override.”
However, the individuals in the second level are often allowed to recruit their downlines, where the perks given to their upline are given to them. The first upline on the chain is paid an override from sales made from each level below them–irrespective of the number of downlines. For an individual to join as a recruit, they’re required to purchase the company’s product.
Before recruits are registered in an MLM scheme, such individuals must first purchase a stipulated product inventory. In most instances, the Multi-level Marketing agencies don’t repurchase these products, and in instances where they do, the product is purchased at a small price. This characteristic makes most people associate MLM with pyramid schemes, some of which are pyramid schemes. To help reduce exploitation in the sector, associations are beginning to clamor for more laws to prohibit irregularities in the sector.
Legal Meaning of Pyramid Schemes
As stated by uslegal.com, pyramid schemes are fraudulent systems of getting funds that require continued recruiting activity for the scheme to be sustainable. Legally, there are two things that characterize pyramid schemes. These are;
1. New recruits give money to recruiters
2. Recruits are encouraged to enlist fresh recruits to recuperate their investment.
Quite often, new recruits are characterized by the promise of a high return-on-investment within a short period, and they’re only supposed to do nothing but hand over their money and recruit others to do the same.
The scammers behind pyramid schemes put every effort to ensure it’s similar to multi-level marketing activities. However, these con men and women only use money from recruits to pay off early investors. With time, the pyramid scheme will collapse when there are too many recruits and few intakes to keep the scheme going. In the end, most people lose money.
What’s next? Let’s help you with some examples of pyramid schemes to help you further understand how the model works;
Pyramid Scheme Examples
Here are some examples of notable pyramid schemes;
- eAdGear
- Wealth Pools International
- Big Co-op Inc
- Elite activity
We’ll elucidate on each of them so you can have an understanding of their strategy;
Examples 1: eAdGear
eAdGear advertised itself as an accomplished online marketing agency that helps businesses increase their visibility on search engine platforms. However, a report by the Security and Exchange Commission shows that the bulk of the company’s profit is through its investors. That report shows that about $300 million of the company’s revenue came through their pyramid scheme.
According to documents from the Securities and Exchange Commission, eAdGear recruited its investors by promising them as much as $1000 daily or an annual payment of $3.6 million. A way to earn through this platform is that member bring in new recruits. This is the only identifiable way for the company to keep up its mouthwatering promise to investors.
Example 2: Wealth Pools International
The Securities and Exchange Commission froze all assets belonging to Wealth Pools International in December 2007. This is due to the company’s fraudulent activities as a pyramid structured company.
To its investors, the company said it’s involved in selling Spanish and English language DVDs via a network of sales associates. The company’s new members were tasked to purchase DVDs that they’re required to resell for profit. However, the primary means of profit for recruits was to recruit new members and not by selling DVDs. Reports suggest that the scheme impacted about 70,000 persons in over 64 countries, and it’s estimated to have cost over $132 million in only 2007.
This type of pyramid scheme is often regarded as a product-based pyramid scheme.
Example 3: Big Co-op Inc
In 2010, the founders of Big Co-op Inc were charged for operating a pyramid scheme. Here, members were tasked with purchasing a license that entitled them to earn commissions from selling Big Co-op products, including selling licenses to new recruits.
The company claimed that it earned immense profits from selling Big Co-op products and not through issuing licenses to recruits. However, an investigation done by state and federal authorities proved that nearly all the organizations’ profit came from selling new licenses and monthly dues by new members.
Investigation shows that this scheme cost thousands of California residents more than $8.2 million. The founders are currently being trailed, and they face more than 20 years of imprisonment.
Example 4: Elite Activity
Harvey Joseph Docstader Jr was sentenced to two years imprisonment in 2007 by the federal appeals court for operating Elite Activity–a pyramid scheme. This scheme requested that participants partake in a “cycle of abundance.” During this scheme, participants are required to contribute a monetary gift and will, in turn, get a substantial amount as profit when they recruit new members.
Dockstader encouraged members to join this scheme with a claim that it was divinely inspired.
Elite activity is generally deemed as a naked pyramid scheme.
MLM Company Examples
There are many examples of Multi-level marketing companies. However, we’ll elucidate on only a few noteworthy ones. Here are they;
- Amway multi-level marketing company
- Avon
- Herballife
Example 1: Amway multi-level marketing
This company sells beauty, home care, health, and beauty product across all continents of the world. The company was established in 1959 and reported over $8.8 billion in sales in 2018.
Amway uses a combination of multi-level marketing strategies as well as direct selling for its sales. The company’s distributors are internally referred to as independent business owners who either sell their products directly or coach others to become independent business owners.
IBOs have an opportunity to earn income from selling a product and performance bonuses that they and their IBOs sell. People also register as an IBO for discounts on products.
Harvard Business School recently published Amway as the most profitable direct selling company in the world, and the company attributed its success to its multi-level marketing scheme in which independent distributors receive percentages of product they and their downline sales.
Example 2: Avon multi-level marketing
Avon is the oldest multi-level marketing company in existence, and it has been since 134 years ago. As ratings by Title Max shows, it’s the 2nd largest MLM company after Amway. Avon’s main business entails the manufacturing and sales of personal, beauty, and household products. The company deals with millions of users around the globe. The company’s recent revenue report shows a total sales of $5.57 Billion, while its turnover is $4.7 million.
The company was founded in the UK by David H. McConnell in 1886. He launched his career in bookselling, where he sells books around the neighborhood in New York homes. Later he moved to perfume sales. He registered his company in 1892 as California Perfume Company; it was then registered as Avon Product Inc on October 6, 1939.
Albeit Avon entered into the Chinese market in 1990, the company was outlawed in 1998, when the brands’ products were sold only as Beauty Boutiques. Eight years after, the restrictions were uplifted, and it currently works as a direct selling company.
Example 3: Herbalife
Herbalife has a target to improve the nutritional habits of the world and offer company members to work for themselves while they live healthier.
Generally, the company is a global networking one that manufactures and sells supplements, sports nutrition, personal care products, and weight management. The company’s chairman is John O. Agwunobi.
Herbalife currently operates in over 94 countries through its network of over 4 million independent members and distributors. The company’s headquarters are in California, a commercial city in the United States. The company recorded net sales of $4.9 billion, a figure relatively flat compared to 2018’s figure.
Herbalife has a net income of $26 million, and it’s currently ranked among the top 10 MLM companies in the world.
Example 4: Infinitus
Infinitus is a multi-level networking company that’s domiciled in Asia and known for its health care products. Infinitus in itself is a parent company to the Lee Kum Kee brand, a notable cooking utensils producer.
In addition, Infinitus is currently promoting its product across the globe in over 100 countries across every continent with many representatives, and it’s poised to maintain its global dominance in the future. Infinitus provides a range of products and provides its members with a great source of income. The company has its headquarters situated in Hong Kong. It started with a sole mission to advocate Chinese wellness to live a healthy life. Infnitus’s first product name is Tonic, and it was launched in 1994. Right now, Infinitus currently has 36 branches and 28 service centers that provide health care, home care products, and personal care.
5 Red Flags to Consider
MLM scams are real! To help avoid falling into one, we’ll consider 5 red flags to consider;
Red Flag 1: Endless recruitment chains
For many multi-level marketing programs, your income depends majorly on the number of downlines you’re able to recruit and the amount of product they buy. As a general guideline to evaluating an MLM program, if it’s important to recruit to achieve success, or the major motive of founding the scheme is having a downline, then it’s not a viable revenue source. The only sets of people that earn a significant amount from such schemes are those that joined early. Also, you must determine if your success is at others’ expense or it’s mutually beneficial.
Summarily, an MLM with endless recruitment only succeeds when there’s infinite expansion, and this is not possible since the market is finite.
Red Flag 2: Advancement by Recruitment
Avoid schemes that pay plan rewards when you recruit others to sell its services and product. It’s also worthy of note that MLMs that term their members as distributors are often just recruiters. So you might want to investigate before parting with your money. They’re better regarded as chain sellers or investing participants. Also, an accumulation of incentivized purchases for an extended period of time may also mean you’re in a pyramid scheme; this is particularly true if most of the company’s money comes from recruitment.
Red Flag 3: Upline gets Most of the Rewards
Another red flag to watch for is when most rewards go to the upline. Before joining an MLM company, it’s best to ask if a participant will receive the same as uplines that are several levels above them. Or would you have to recruit anyone to make a living from the scheme?
While it’s easy to identify the first two red flags, this one involves having an apt understanding of the complex incentives and alternative distribution models. You need to first factor in Incentives and group bonuses to understand the stipulated payout on each sale. Sometimes these bonuses are paid as larger discounts or per sales commissions.
How to Decipher a Pyramid Scheme
When it comes to investing, you should first watch out for the following signs;
- The promise of abnormally high returns
- Guaranteed returns
- The promise of consistent returns regardless of economic downturn
- The incessant need for more recruits
- Vague business model
