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When does an MLM become a pyramid scheme?

On Behalf of | Jun 23, 2023 | Criminal Defense

Did you join a direct-sales company hoping to be your own boss and make thousands of dollars, only to find that it is not all it’s cracked up to be? Millions of Americans join multilevel marketing (MLM) companies yearly but quickly realize it is far from easy. Worse still, many join what they believe is a legitimate company but is a pyramid in disguise.

MLM vs. Pyramid scheme: What’s the difference?

When discussing multilevel marketing, it is difficult not to bring up pyramid schemes. While the two share similarities, they also have key differences which help determine their legality.

  • MLM: Participants join the company as a distributor or independent contractors to sell actual, tangible products. They can earn additional income by recruiting other distributors who become their downline. Distributors earn commissions based on how much they sell and a percentage of their recruits’ sales. Generally, an MLM may be legitimate when its focus is on the sale of products rather than recruiting members.
  • Pyramid: Participants pay upfront fees and earn money from the fees of their recruits. The more people you bring in within a specific time frame, the bigger the payout. Because most pyramid schemes do not involve products, there is a big chance that participants will lose money when they cannot recruit anyone.

If the business you are in focuses on recruitment and promises easy money, it is most likely a pyramid scheme. However, some pyramid schemes also involve low-value, unsellable products and services to disguise themselves as an MLM company.

In a pyramid scheme, participants must pay substantial joining fees before they can sell products or recruit people. They also have to buy the products themselves. Unlike an MLM, a pyramid company will not buy back any unsold merchandise, leaving victims with a warehouse of stocks and out of cash.

Protect yourself from a pyramid scheme

Even if you are an unwitting member, participating in a pyramid scheme can result in criminal charges. If convicted, you may face imprisonment and fines of up to $2,500.

Many pyramid schemes start as legitimate MLM businesses. If you are caught up in an illegal business, it may be best to seek a criminal defense lawyer to help prove it was not your intention.