You might be in a pyramid scheme if …

 pyramid scheme?

 Is this a pyramid scheme?


Have you ever prospected someone and the first question that they ask is, “Is this a pyramid scheme?” If you haven’t been asked that question, then you haven’t been in the business very long or you haven’t prospected anyone yet.

Have you ever wondered why so many people will ask you if your business is a pyramid scheme? Let’s see how the Securities Exchange Commission (the SEC) defines a pyramid scheme. You can visit the SEC’s website and read their guidelines here.

What is a pyramid scheme?


Products or services

A network marketing should have an underlying product or service that it sells to people who are not distributors in the company. You should do your very best to find out what percentage of the company’s sales are to actual customers. If the company is surviving on sales to its distributors, then you and they may be in trouble.

The goal of any company, whether it is a network marketing company or not, should be to sell its products or services to people who are not in the business.


Quick return of a distributor’s investment


quick profits?


If a company makes promises of distributors getting their money back, quickly, then there could be problems. The company may be using funds collected from new distributors to pay the established distributors. This is what happens in a Ponzi scheme. New money should be generated from the sales of the products and services to people who aren’t in the business.


Easy money and passive income

If you are told that you will compensated for doing very little work or recruiting others, you could be involved in a pyramid scheme. The company could ask you to do things like making monthly payments or investments, recruiting others, and placing ads. All of these kinds of activities could be done in order to fill open spots below you. That would be a pyramid scheme.

In this case, I believe that passive income is being used for money earned without doing any work.  Which is different than residual income which is money that is paid for work done previously.


A distributor is required to pay to join

Beware of any company that requires you to pay a fee to join their program. That’s right! Even if it is a small monthly fee or a one time fee.


Understanding the compensation program

The compensation plan should be easy to understand. If it is so complex that you do not understand it, then you could be involved in a pyramid scheme. Also, if the pay plan is based on recruiting new people into the business instead of the sales of the products or services offered, then you should be leery. The compensation plan should be easily understood. If you can’t understand it then it could be easy for the company to cheat the distributors out of commissions that they earn.


Recruiting vs sales


recruiting or sales?


If the company’s emphasis is on recruiting new people instead of selling the products and services then you are likely involved in a pyramid scheme. You should be able to make decent money from selling the products or services. If the company’s focus is on recruiting new people into the company, you could be looking at a pyramid scheme.

This is what the SEC advises people to look for when there are considering joining a network marketing company and this is how they define a pyramid scheme.

When I read those guidelines, my first thought was, most network marketing companies do most of those things. It’s no wonder that every time the SEC or FTC gets a bug up their hat they go after a network marketing company as being a disguised pyramid scheme. It’s also no wonder that most network marketing companies have high priced lawyers on their staff.


under investigation


How does your current MLM stack up against these federal guidelines?

All network marketing companies are innocent of being a pyramid scheme until proven guilty!


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