How to spot a legitimate multi-level marketing scheme from a pyramid scheme

capitalism-40606_640A lot of people have found online jobs which are lucrative and viable while some people have been scammed or been involved in illegitimate businesses through online offers. The two most popular that we may have come across are multi-level marketing (MLM) and the pyramid schemes. The main difference between these two is that while multi-level marketing is legal, pyramid schemes are not. It is therefore worth checking to make sure you have not been trapped into a pyramid scheme under the guise of multi-level marketing. 

Pyramid schemes thrive on getting new recruits and using this money to pay existing employees. Once there is no longer a pool of new recruits to make money from, the company eventually collapses. Multi-level companies on the other hand are expected to sell genuine products and derive their profits from the products and not the new recruits. These schemes range from businesses such as make up, tea and slimming products and health care products. It is up to you to use your judgement to decipher that when you are selling something that has no tangible value and is virtual, you are most likely on a pyramid scheme.

Even with multi-level marketing schemes, you also need to check that it is the right fit for your skills as most of them are based on your ability to sell the products and also convince others to be sales agents. You therefore have to ensure that you are making sufficient money from selling the products on their own without the added income of recuiting others as the recruitment pool of family, friends and friends friends is highly limited.

The U.S. Securities and Exchange Commission a few years ago identified a few pointers to help people identify whether what they have been sold or what they are about to be sold is a multi-level or a pyramid scheme. These are the points identified by the SEC to look out for. All the best in your online working scheme.

  • No genuine product or service. MLM programs involve selling a genuine product or service to people who are not in the program. Exercise caution if there is no underlying product or service being sold to others, or if what is being sold is speculative or appears inappropriately priced.
  • Promises of high returns in a short time period. Be leery of pitches for exponential returns and “get rich quick” claims. High returns and fast cash in an MLM program may suggest that commissions are being paid out of money from new recruits rather than revenue generated by product sales.
  • Easy money or passive income. Be wary if you are offered compensation in exchange for little work such as making payments, recruiting others, and placing advertisements.
  • No demonstrated revenue from retail sales. Ask to see documents, such as financial statements audited by a certified public accountant (CPA), showing that the MLM company generates revenue from selling its products or services to people outside the program.
  • Buy-in required. The goal of an MLM program is to sell products. Be careful if you are required to pay a buy-in to participate in the program, even if the buy-in is a nominal one-time or recurring fee (e.g., $10 or $10/month).
  • Complex commission structure. Be concerned unless commissions are based on products or services that you or your recruits sell to people outside the program. If you do not understand how you will be compensated, be cautious.
  • Emphasis on recruiting. If a program primarily focuses on recruiting others to join the program for a fee, it is likely a pyramid scheme. Be skeptical if you will receive more compensation for recruiting others than for product sales.
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