SCAM ALERT: Pyramid Schemes

Published: Nov. 18, 2010 at 5:03 PM EST|Updated: Nov. 18, 2010 at 5:13 PM EST
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(WOIO) - In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.

The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money.

Better Business Bureau

Millions of people have found success in direct selling for companies using a multi-level compensation plan. Unfortunately, not all opportunities are legitimate and it's easy to get caught up in the enthusiasm and big promises of a pyramid scheme posing as a trustworthy company. So how do you tell the difference? Answer the following questions:

Is the start-up cost reasonable? A legitimate company will generally offer a startup kit that includes product samples, catalogs, order forms and other essentials that you need to get started selling. The median cost of a kit is $99, but can range from free to several hundred dollars depending on the type of product being sold. A pyramid scheme on the other hand will often require a large upfront investment of several thousand dollars for which you get little more than the right to recruit others.

Does your compensation come from selling products and services or from recruiting others? The money-making potential in a legitimate multi-level marketing company will rely primarily on selling products - be it from your own sales or the sales made by your recruits. In a pyramid scheme money is made by the recruiter from the fees paid by new recruits, regardless of whether they sell anything. Additionally, be sure products and services are being sold to the ultimate consumer of those products instead of passing large quantities of product from seller to seller.

Will the company buy back sales kits and unsold inventory? Most direct selling companies do not require large inventory purchases, but if one does, be sure to check out the buyback policy. All Direct Selling Association member companies are required to repurchase, at no less than 90 percent of the purchase price, any marketable inventory and sales aids purchased in the past 12 months if you decide to quit the business. You should not risk financial loss by trying direct selling. Pyramid schemes often try to disguise their deception by offering a sham product, so beware of a company that requires a large inventory purchase with no return policy.

The bottom line is that a legitimate company will portray an honest picture of the opportunity, including the possible risks, rewards, and challenges. A pyramid schemer, however, will enthusiastically sell you on the promise of making tons of money with little effort. Successful direct sellers treat the experience like running a small business. There are no short cuts to success. Keep a level head and evaluate all opportunities objectively. If you feel pressured to make a decision with which you are not comfortable, or if the opportunity sounds too good to be true, just walk away.

Before signing up with direct selling company, check the company out with your BBB at or on the Direct Selling Association's website at


'Tis the season for consumers to be confronted with a wide range of health, beauty and fitness products and promotions. Many of these items aren't available on store shelves and are sold only through distributors.

What Are You Buying?

Many companies that market their products through distributors sell quality items at competitive prices. But some offer goods that are overpriced, have questionable merits or are downright unsafe to use.

The Federal Trade Commission warns consumers to apply a healthy dose of caution before buying products advertised as having "miracle" ingredients or techniques and guaranteed results. Many of these "quick cures" are unproven, fraudulently marketed and useless or even dangerous.

Before using one of these products, the best prescription may be to check with a health professional.

What Else Is For Sale?

Some distributors sell more than diet and exercise plans, vitamin supplements or wonder creams. Many may sell "opportunities," too-a chance for you not only to buy, but also to market, the products. In addition to describing the benefits of their product or program, these distributors may encourage you to become a distributor.

If you sign up as a distributor, you may be promised commissions or other rewards-for both your sales of the plan's goods or services and those of other people you recruit to become distributors. These plans, often called "multilevel marketing plans," sometimes promise commissions or rewards that never materialize. What's worse, consumers are often urged to spend or "invest" money in order to make it.

Watch Out For Pyramids

Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They're actually illegal pyramid schemes.

Why is pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people-except perhaps those at the very top of the pyramid-end up empty-handed.

How to Evaluate a Plan

If you're thinking about joining what appears to be a legitimate multilevel marketing plan, take time to learn about the plan before signing on.

What's the company's track record? What products does it sell? How does it back up claims it makes about its product? Is the product competitively priced? Is it likely to appeal to a large customer base? What up-front investment do you have to make to join the plan? Are you committed to making a minimum level of sales each month? Will you be required to recruit new distributors to be successful in the plan?

Use caution if a distributor tells you that for the price of a "start-up kit" of inventory and sales literature -and sometimes a commitment to sell a specific amount of the product or service each month-you'll be on the road to riches. No matter how good a product and how solid a multilevel marketing plan may be, expect to invest sweat equity as well as dollars for your investment to pay off.

Your Responsibilities

If you decide to become a distributor, remember that you're legally responsible for the claims you make about the company, its product and the business opportunities it offers. That applies even if you're simply repeating claims you read in a company brochure or advertising flyer.

When you promote the qualities of a product or service, you're obligated to present those claims truthfully and to ensure there's enough solid evidence to back them up. The Federal Trade Commission advises you to verify the research behind any claims about a product's performance before repeating those claims to a potential customer.

Likewise, if you decide to solicit new distributors, be aware that you're responsible for any claims you make about a distributor's earnings potential. Be sure to represent the opportunity honestly and to avoid making unrealistic promises. If those promises fall through, remember that you could be held liable.

The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or get free information on consumer issues, visit or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. Watch a new video, How to File a Complaint, at to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.