Is network marketing a Ponzi scheme?


Most network marketing companies aren’t illegal pyramidsis network marketing a ponzi scheme

The network marketing industry gets kicked around a fair amount. A lot of it is with good reason! One of the most often sited problems with network marketing is that it’s a scam, a fraud, a pyramid or a Ponzi scheme.


It sure seems like the SEC and the FTC keep a very watchful eye on the network marketing industry. If anyone gets out of line they’re right there to take them down or at least make an example out of them. Most of the governmental actions stem from where does the money come from for the payouts to the distributors.


A pyramid scheme and a Ponzi scheme are similar in structure and operate in a similar fashion. I’m going to go about this discussion by focusing on the Ponzi scheme.


The Ponzi scheme is named after one of the first and certainly the most infamous of fraudsters. Charles Ponzi started his investment firm and promised large returns on people’s investments. He also told them that there was very little risk involved in his investment strategy. Those two promises are enough to get almost any investor to drool.


Ponzi was able to get several people to invest with his firm and he started to issue statements showing how much money his investors were making. There may have been money being made, in the beginning, or maybe there were never any profits made. It didn’t matter to Ponzi. The investors would be so impressed with the rate of return on their fake statements that they would refer their friends and colleagues. If someone wanted to withdraw money from their account, Ponzi would take the new investor’s money and pay the person withdrawing money. The investment was proven to be good and solvent and this increased the believe-ability in his strategy and his firm. This brought, even more, investors into his firm.


He was able to use the money from new investors to pay the older investors and keep the business going. All the while he was paying himself some of the money that was coming in. It’s a great scam right up until you can’t bring in enough new investors to pay out to the older investors who want to withdraw some or all of their money.


As soon as enough older investors want their money and there isn’t enough new money to pay them, the scheme collapses. Ponzi was able to operate for a year before his scheme collapsed. He wrecked people, financially, to the tune of $20,000,000. That doesn’t sound like that much money, but that’s over $200,000,000 in today’s dollars.


For his crimes, he spent a mere 3 ½ years in prison. He died, broke, at age 66.


charles ponzi


The hallmark of a Ponzi scheme and a pyramid is that the money being paid out comes from the investments of new people.


Does this mean the network marketing is a Ponzi scheme or a pyramid?


On the surface, it might seem like the money to pay the distributors is coming from the new people who are joining the business. If that were true, then it would be a pyramid or Ponzi scheme.


To eliminate the appearance that this was true, the government implemented new rules.


The FTC came up with rules that govern the industry. If the money being paid out comes from the actual recruiting of new distributors or from the amount of products that the distributors buy, then it can be considered a Ponzi scheme or a pyramid.


If the majority of the money comes from the sale of the company’s products to people who aren’t distributors then it is not a Ponzi scheme or a pyramid.


If you have any concerns as to whether or not your network marketing company is a pyramid or Ponzi scheme, ask them to provide you proof of what percentage of products are being sold to non-distributors.


The “Amway Safeguards” were put into place in the late 1970s. They said that 70% of all products that a distributor buys have to be sold to people who aren’t distributors. If a company can prove that 70% of their products are sold to non-distributors, then they are legal and not a Ponzi scheme or a pyramid.



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