Beware of Pyramid Schemes Posing as Multi-Level Marketing Programs
Are you ever tempted by an ad or offer to earn “easy money” from your home?
Multi-level marketing (“MLM”) is promoted via Internet advertising, company websites and social media. It also includes presentations, group meetings, conference calls, and brochures. MLM programs typically pay you for the products or services you, and your distributors ( ., participants in the program) sell to other people. However, some MLM programs are actually pyramid schemes — a type of fraud in which participants profit almost exclusively through recruiting other people to participate in the program.
MLM schemes that masquerade as pyramid schemes often break federal securities laws. These laws include laws that prohibit fraud and require the registration of securities offering and broker-dealers. In a pyramid scheme, money from new participants is used to pay recruiting commissions (that may take any form, including the form of securities) to earlier participants just like how, in classic Ponzi schemes, money from new investors is used to pay fake “profits” to earlier investors. The SEC sued large-scale pyramid scheme operators for violating federal securities laws under the guise of MLM programs.
Beware of the signs of a pyramid scheme when you are considering joining an MLM program.
There is no genuine product or service. MLM programs allow you to sell a product or service to others who are not part of the program. Be cautious if the underlying product or service is not being sold to anyone else, or if it appears that the price is too high.
High returns within a short period. Avoid scams promising “get rich quick” and exponential returns. A MLM program that promises high returns and quick cash may make you think that the commissions are paid from money earned by new recruits, rather than product sales revenue.
Passive income. If you receive compensation for doing little work, such as recruiting other people, placing ads, or making payments, be careful.
There is no demonstrated revenue from retail sales. Ask for documents such as financial statements that have been audited by a certified accountant (CPA) to show that MLM companies generate revenue from selling their products and services to individuals outside of the program.
Buy in. An MLM program’s goal is to sell products. You should be aware that you may need to pay a purchase-in in order to join the MLM program.Do not worry if commissions are based upon products or services you or your recruits sell outside of the program. Be cautious if you don’t understand how you will get paid. Focus on recruiting. A pyramid scheme is one that focuses primarily on recruiting other people to the program in exchange for a fee. If you are offered a higher compensation for recruiting other people than for selling products, be skeptical.
Emergency enforcement actions have been taken by the SEC to stop pyramid schemes, which violate federal securities laws. This includes schemes disguised under MLM programs.
In a recent litigation, SEC.v. CKB168, SEC brought charges against the SEC to stop an alleged pyramid scheme that was being operated under the guise of an MLM program for online child’s courses. The scheme’s promoters allegedly sought investors from all over the world, and targeted members of Asian-American communities in New York City and California. CKB was misrepresented by the promoters as a legitimate MLM company that sold web-based educational courses for children. CKB does not have any retail sales, and has no revenue source other than money it receives from new investors.
SEC v. Rex Venture Group was an adjudicated settlement action. The SEC stopped a $600m fraud that deceived approximately one million Internet users through a complex investment scheme that involved a Ponzi scheme that promised daily profits and a pyramid scheme. This scheme was promoted as an MLM program for Zeekrewards.com. Zeekler.com is a penny auction site. SEC claimed that the defendants offered bonuses and commissions to customers who signed up for a monthly subscription and recruited others to the scheme. According to the SEC, however, customers’ funds were pooled to pay out bonuses to existing customers to recruit because there wasn’t substantial revenue from product sales.
Pyramid schemes are impossible to sustain and will eventually collapse. Avoid pyramid schemes and their warning signs.