Pyramid Scheme. That is what many think within minutes of the presentation of an ‘exciting’ income from home opportunity.
In truth, Pyramid Schemes (aka – Ponzi Schemes) have been around for centuries and continue to exist today. It is a real fear that has real consequences, and recruiters should acknowledge this fear as they showcase how their opportunity is not at all a pyramid scheme.
Are All MLMs Pyramid Schemes?
MLMs (Multi-Level Marketing) and Direct Selling opportunities have unfortunately been lumped in as the same thing as a Pyramid Scheme for those who do not know better. I really can’t blame the outsider for thinking that way. Fraud operations always wear the disguise of legal structures until it is discovered for what it truly is.
Today, many ‘ground floor’ opportunities may still really be Pyramid Schemes and the closer to the ground the opportunity is, the few bits of evidence there is to be sure. It is after a few years of operation that the evidence shows up and the operation gets closed down with many left with massive losses, possible criminal charges, and new enemies from those who felt they were dealing with a trusted associate. I learned the ground floor lesson the hard way.
Long existing opportunities do not get a free pass either. You would think that standing the test of time is a pretty good enough indication of corporate credibility.
In a July 15.2016 article, the 36-year-old Herballife company got a major operational FTC slap. and will have to completely restructure if it hopes to continue in existence. A damaging paragraph from that article is:
“it’s virtually impossible to make money selling Herbalife products. As explained in the complaint, our analysis shows that half of Herbalife “Sales Leaders” earned on average less than $5 a month from product sales. For folks who invested the most to build an actual retail business – a brick-and-mortar store that Herbalife called a Nutrition Club – the majority made nothing or even lost money.”
That family member, friend or associate who excitedly shares their new find with you, hoping you will join them – are not doing so knowingly suckering anyone into a Pyramid Scheme. Only the greedy owners and administrators would know that their operation is not legit. These innocent investors inadvertently spread the operation till it gets on the radar of the authorities.
So how can we tell?
Should we simply avoid all business opportunities that come our way?
Clearly, the answer is NO! Being open to an income opportunity is wise. Going in without due diligence is not.
Due Diligence is a Must for ANY Financial Risk Exposure
There is a reason why successful MLMs, Direct Selling, and similar opportunities seem attractive to those open to listening. I speak to this directly in an earlier blog (click here to read), but in a nutshell, these opportunities provide a super-affordable, turn-key opportunity with many done-for-you services built in, including training and access to administrative, and personal development support. Almost any business you could want to start from scratch today has an MLM/Direct Sales version in existence.
According to the US Census Bureau, “The U.S. Census Bureau reports that 400,000 new businesses are started every year in the USA, but 470,000 are dying.”
So, no matter the business model you choose; most lose their start-up capital shortly after opening their doors.
According to the SBA, the average start-from-scratch entrepreneurial adventure costs $3K – $30K, and most go into that with no real budget or plan to spend $3K. It is pretty challenging to create an investment budget when you go into the uncharted waters of an all-on-you-to-figure-it-out operation.
$3K start-from-scratch versus $500 or less for a turn-key with success stories; and the MLM suddenly seems an easier, low-risk decision. It truly is a financial risk to invest in any business, but honestly, it is a very low financial risk to invest in an MLM or a Direct Selling business model. This may be the reason so many go in and out of these programs like revolving doors.
Having researched the definition of a pyramid scheme and having taken a look at both the USA Federal Trade Commission & Securities & Exchange Commission (SEC) guidelines; I feel I can offer five tell-tale signs that the opportunity you are watching the presentation for, or currently in, may ultimately get the FTC designation of being a pyramid scheme.
Here is what to check for in the opportunity you are in or considering:
Download Your own copy of this FREE checklist so you can compare it against any MLM, Network Marketing or Direct Selling opportunity you are considering, or currently in. NO EMAIL REQUIRED! However, if you find value here, I will ask you to consider signing up below for (easy to unsubscribe) access to more #ProfitableStewardship strategies to your inbox.
Pyramid Scheme Definition
According to Investopedia (a very credible resource for all things financial) the definition is:
“A pyramid scheme is an illegal investment scam based on a hierarchical setup. New recruits make up the base of the pyramid and provide the funding, or so-called returns, the earlier investors/recruits above them receive. A pyramid scheme does not involve the selling of products. Rather, it relies on the constant inflow of money from additional investors that works its way to the top of the pyramid.”
The ‘Sniff Test’ in Action
1. There are no products for sale
This is the classic, and purest form of a pyramid scheme. It is simply a money cycling program with nothing more behind it than a promise of more money to those higher up the chain, so there is a heavy incentive to build an army of recruits to push the recruiter higher up the pyramid from the base.
The Federal Trade Commission is automatically suspicious of all new MLM and Direct Selling companies until time proves they are legitimate. TIME! That is why I caution about ‘ground floor’ opportunities. There is a rigorous standard that these companies have to show they meet, and it takes time for all those components to show up and be validated.
But My Biz Opp Sells Products? So it could not be a Pyramid Scheme, Right?
Technically; but there is more. For one thing, the FTC has a definition for PRODUCT-BASED Pyramid Schemes. In this case, the company has a product(s) but that is just a cover because the product is inconsequential to the recruiting drive, nor is any effort made to push product sales.
2. The Real Money Comes from RECRUITING v. Product Sales.
“FTC guidelines and most state statutes include a key element in defining pyramid schemes – the payment of money by the company in return for the right to recruit other participants into the scheme. If the primary emphasis is compensation from recruiting, rather than from the sale of products to end users, it is considered a pyramid scheme. How such primary emphasis is to be determined has until now been a formidable challenge for investigators.”
It is this ‘formidable challenge for investigators’ that causes a delay from ‘ground floor’ to shut down; however, if the opportunity cannot pass the 5 Tells, I would recommend you keep your money in your wallet.
FOR EXAMPLE: I was approached to consider a fashion jewelry opportunity (I will not mention the company name). The Rep is a friend, so she dropped her guard as she chatted and mentioned that she made $200 for helping a new recruit throw her first home product party,. I asked the appropriate questions to flush out that the $200 she would make on this new recruit was more than the hostess was likely to make from product sales at the party, even if she had stellar event sales. Also, she (the Rep) would make $0 for helping this recruit throw party #2.
This is a perfect example of an opportunity I would stay clear from. Even if this company has not gotten FTC slapped YET, there is a good chance one would come at some point, maybe even orders to shut down permanently. In this example, the focus and financial incentives were to get the recruit in the pool, but not on helping the newbie build a sustainable business of their own. Truth be told, this could also be a simple case of a rogue Rep who is on track to misrepresent a totally legitimate program. Sad. That is a real possibility, and some MLMs suffer from the claims of unethical Representatives.
More MLMs are getting better at dodging the FTC’s issue with big recruiting UPFRONT incentives. For some MLMs, you can become a Rep and still earn an income for $0 invested. Some charge under $50 for getting your website and back office set up, with none of that sign-up fee going to the recruiter. Look for these plans. Where these exist, the recruiter has more vested in seeing the recruit succeed on the back end. So very often, the push is to sign you up PLUS roll you into a product package where they will earn a commission.
3. You need a massive downline to make back your sign-up investment.
Well, if it cost you $0 or less than $100 just to sign up for the opportunity to earn an income, that can hardly be seen as needing a massive downline to recoup your investment, because most people ‘throw away’ this kind of cash on a night out on the town.
However, when it comes to earning the usual $500/month bait that many of these companies tease the recruit with, the good ones will show you company strategies to making $500/month with a zero to small downline. If you need more than three levels of recruits to make $500 with no other strategy for doing so, consider this one as possibly not passing the ‘sniff test’.
4. There is no financial benefit to the recruiter beyond signing you up.
This one is not a consideration of the FTC or the SEC, but it is a HUGE ‘Tell’ in my books and a ‘knock-out’ filter as far as I am concerned.
A recruiter that will not direct a new recruit to a resource(s) for leadership, support, training, even if they are not the one directly doing it – is stink, stink, stink! Even if the FTC gives this one the all clear, you may want at least find another leader to sign up with. It should benefit those above you to help you succeed. This is actually the best feature of the MLM business model. Without it, you should probably RUN and keep your wallet in your pocket!
5. Has the company been around at least 7 years?
This is not an FTC or SEC concern, but it is for me. I learned the hard way of going in on a ‘ground floor’ MLM which never made it to its 5th year anniversary. Not only did I have personal losses, but those I innocently recruited just before the wrap-up I did not know was coming – also had real losses. This business opportunity promoted sales for a product line I still purchase today from other sources. Since this company passed all my other 4 ‘Tells’ and still locked its doors, I felt compelled to add this filter to my ‘sniff test.’
Because so many start-ups fail, the 7th-anniversary survivors seem to have passed some invisible hurdle that launches the company into a massive growth spurt.
This is a ‘catch 22’ one. A company may not make it to 7 years if there are no early risk takers, but for me, I have decided that I will not be one of those.
1. If you are already in a business opportunity, run what you know about it through my sniff test, and call your upline if you need more information to be able to check them all.
2. if a lifestyle upgrade or financial independence is your goal – honestly, a J-O-B is not likely the answer. It truly is a financial risk to invest in any business, but it is less of a financial risk to invest in an MLM or a Direct Selling business that the start-from-scratch model.
Investing in any business opportunity is STILL the fastest way to wealth.
Naturally, I use these 5 ‘tells’ to evaluate the companies I choose to get involved in.
If you are curious about being on my teams and adding to your income or creating a full-time income, using the affordable, turn-key option of a home-based business.You only need to ask.
So if you are going to take a risk and invest in you, do your due diligence, and connect with me to learn more.