Pyramid Schemes
A pyramid scheme is an illegal way of making money that relies on an endless stream of recruits to make a profit. In Arizona, a multi-level marketing program is considered a pyramid scheme when participants earn more money from bringing others into the program than from the sale of goods, services, or intangible property.
Pyramid schemes typically involve finding a new recruit who pays money to enter the scheme. Then that new individual makes money by recruiting new participants rather than selling products. These newer recruits themselves must recruit new participants to make money. Thus, it creates an unsustainable cycle where it quickly becomes impossible to find new recruits and most members are unable to make a profit. Pyramid schemes are successful because potential recruits are told they can make quick, easy money. In reality, it is almost mathematically impossible to make any money at all unless you are at the top of the pyramid.
Be extremely wary of any type of investment opportunity that sounds like a pyramid scheme. Anyone who starts, operates, advertises or promotes a pyramid scheme can be charged, either civilly or criminally, whether or not they actually earn monies from the program.
Multi-Level Marketing
A Multi-Level Marketing company (or MLM) is a business model where the salespeople make money from selling products and from recruiting new salespeople. The salesperson receives a portion of the money when his or her recruit sells the product. Many MLMs are not illegal. However, depending on the set up and payment structure, some MLMs can be illegal pyramid schemes, and even legal MLMs have some risks. If you become involved in this type of business, keep the following in mind:
- Make sure you are being compensated based on your sales or your downline’s sales to customers who are not part of the company.
- Be careful if you are pressured to buy too much of the product yourself. While you may be required to purchase some products before you start selling, avoid agree to pay for more product than you can afford on the hope that you will be able to sell it to someone else.
- Make sure that the company will buy back the products that you do not sell.
- While a few sales people may make an extraordinary amount of money, remember that the vast majority of participants in MLMs do not make significant amounts of money.
- Be careful if the company promises that you will make a specific amount of money if you just “work hard enough.” Also watch out if the company makes a promise of how much time or effort you will need to put in to selling the product, such as saying you can make a living working “part time.”
- Make sure that you review the company’s Income Disclosure Statement, which shows information about the earnings of the company’s other salespeople.
- Make sure that claims the company makes about the product are accurate.
- Watch out for being required to take expensive trainings or other business expenses.
- If something doesn’t feel right, then that company may not be for you. Do not dismiss your intuition.