Consumer Fraud Reporting
Pyramid Scams
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Internet Money-Making Pyramid Scams

This page has a summary of pyramid schemes which are typically a specific, illegal subset of MLM's (multilevel marketing organizations).  See this page for more information about MLMs.  Click on the buttons at left or the links below for more detailed information about:

The internet is filled with various forms of multi-level marketing schemes, selling cosmetics, investments, prepaid legal services, diet plans, diet pills, energy boosters; anything that is part of the latest fad. To lure people into the scam the websites use "make money now", Earn $$$ in a few hours per day" and similar hype. The websites continue to become slicker.  Some even try to make themselves look more legitimate or credible by warning you about OTHER scams!


Multi-level Marketing Schemes

Multilevel marketing plans, also known as "network" or "matrix" marketing, are a way of selling goods or services through distributors. These plans typically promise that if you sign up as a distributor, you will receive commissions -- for both your sales of the plan's goods or services and those of other people you recruit to join the distributors. Multilevel marketing plans usually promise to pay commissions through two or more levels of recruits, known as the distributor's "downline." See this page for much more information specific to MLMs.

Pyramid schemes

The most common form of the MLM scam is a pyramid scheme, although all MLM's insist that their plan isn't a pyramid scheme.  You can not believe what they say! If a plan offers to pay commissions for recruiting new distributors, watch out! Most states outlaw this practice, which is known as "pyramiding." State laws against pyramiding say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors. Pyramid schemes offer a return on a financial investment based on the number of new recruits to the scheme. Investors are misled about the likely returns. There are simply not enough people to support the scheme indefinitely. Pyramid schemes and Ponzi schemes are illegal in the United States.

Why is pyramiding prohibited? 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 -- lose their money.

The government (through the Federal Trade Commission) cannot tell you whether a particular multilevel marketing plan is legal. Nor can it give you advice about whether to join such a plan. You must make that decision yourself. However, both CFR and the FTC suggest that you use common sense, and consider these seven tips when you make your decision:

  1. Avoid any plan that includes commissions for recruiting additional distributors. It may be an illegal pyramid.
     
  2. Beware of plans that ask new distributors to purchase expensive inventory. These plans can collapse quickly -- and also may be thinly-disguised pyramids.
     
  3. Be cautious of plans that claim you will make money through continued growth of your "downline" -- the commissions on sales made by new distributors you recruit -- rather than through sales of products you make yourself.
     
  4. Beware of plans that claim to sell miracle products or promise enormous earnings. Just because a promoter of a plan makes a claim doesn't mean it's true! Ask the promoter of the plan to substantiate claims with hard evidence.
     
  5. Beware of shills -- "decoy" references paid by a plan's promoter to describe their fictional success in earning money through the plan.
     
  6. Don't pay or sign any contracts in an "opportunity meeting" or any other high-pressure situation. Insist on taking your time to think over a decision to join. Talk it over with your spouse, a knowledgeable friend, an accountant or lawyer.
     
  7. Do your homework! Check with your local Better Business Bureau and state Attorney General about any plan you're considering -- especially when the claims about the product or your potential earnings seem too good to be true.

PYRAMID SCHEMES

In other cases, schemes are promoted through websites offering expensive electronic gadgets as free gifts in return for spending about $25 on an inexpensive product, such as a mobile phone signal booster.  Consumers who buy the product then join a waiting list to receive their free gift. The person at the top of the list receives his/her gift only after a prescribed number of new members join up.

The majority of those on the list will never receive the item.


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