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Is it a pyramid scheme?

| Aug 4, 2019 | Consumer Protection

Like many in Charleston, there has likely been a time when you were contacted by a friend or associate about a product they are selling in conjunction with the opportunity for you to join them in selling it. You might immediately group all such pitches into the category of “pyramid schemes.” Yet to identify any business opportunity into such a broad category is to overlook the distinguishing elements between actual pyramid schemes and multi-level marketing campaigns. Pyramid schemes are illegal, while multi-level marketing campaigns are completely legitimate. 

You are likely not the first to confuse the two. Indeed, both rely on recruiting others to join a company’s sales force (and them making commissions off of their recruits’ sales). West Virginia lawmakers recognized this confusion, and in 2009 introduced legislation clearly defining multi-level marketing as ”a system of direct selling in which consumer products are sold to consumers by their upline (distributors),…Agents, direct sellers and dealers are also encouraged to build and manage a sales force by promoting, recruiting, sponsoring, motivating, supplying and training others in their downline to sell company products or services. Agents, direct sellers and dealers earnings are then based on the sales of the entire sales force in their downline, in addition to personal sales.” 

The main factor distinguishing pyramid schemes from multi-level marketing campaigns is recruitment. In multi-level marketing, it is an added element of the business, whereas it is the primary goal in a pyramid scheme. Subtle hints that the opportunity pitched to you may be a pyramid scheme include: 

  • Your income being based primarily on your number of recruits
  • A requirement to purchase a great amount of up-front inventory
  • Needing to buy more product to remain active with a company

You can report suspected pyramid schemes to the Federal Trade Commission. 

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