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How Ponzi and Pyramid Schemes Take Advantage of People

Updated: Jun 23, 2023

By Curtis Dawson


To find legitimate money-making opportunities, people need to get background information on the company offering employment as a salesperson. They should also investigate companies offering lucrative investment options for investors within a sales environment.


This is important when considering involvement with multi-level marketing programs (MLM). While these companies appear to offer legitimate opportunities, they could, in fact, be managed by criminals using Ponzi schemes or pyramid schemes to generate revenues for your paycheck or investment.


Recruiting More Employees


MLM, also called network marketing, uses salespersons to distribute products often by direct sales or word of mouth. The motivating factor behind the MLM strategy centers on maximizing the number of employees to significantly increase the sales force. MLMs are more transparent than Ponzi and pyramid schemes and they can be legitimate. Tupperware is an example of an MLM.


What is the difference between a Ponzi scheme and a pyramid scheme? Ponzi schemes appear to be legitimate investment opportunities that build income for long-term investors by obtaining money from new investors who are promised large dividends during their extended tenure with minimal risk.


New investors give money up front to portfolio managers who use this new money to pay long-term clients instead of applying the money towards a legitimate product such as a stock or bond. These are ill-gotten gains for the investor.


In contrast, pyramid schemes require the employee to sell a product or service that will, in turn, generate income for the organization. However, employees earn the majority of their money by recruiting new employees.


Pyramid schemes make most of their money by recruiting new members who pay upfront fees to join the organization. If you earn the majority of your salary through referrals, you are probably working within a pyramid scheme. This is a key indicator of a pyramid scheme.


Real MLM and Inherent Problems


There are legitimate MLM programs offered by some direct sales companies to meet the demands for their products. Avon is an example. These legitimate organizations sell their products and they encourage employees to recruit new salespeople. These are legitimate objectives for any company. These programs are considered high-risk by some business specialists.


Avon developed financial problems due to the lack of demand, more effective competition, and economic slowdowns. Furthermore, the organization has a difficult time with retaining company representatives. This business model has innate flaws. In 2022, Avon announced they would scale back their operations to Brazil and Poland, their two strongest markets.


How Pyramid Schemes Make Their Money


Direct sales organizations – often building their sales teams from disenfranchised prospects – target individuals with few employment opportunities or individuals without knowledge about business transactions. According to one study by the American Association of Retired Persons (AARP), more than 50% of MLM participants left this type of employment after one year. Roughly 90% leave before 10 years.


So when does this behavior become criminal? Pyramid schemes have several identifying characteristics. These employees give a monetary portion of their sold goods or services to the person who recruited them into the organization. This is referred to as downline and it creates an incentive for employees to recruit new members for the company who will, in turn, bring more money into the scheme.


How to Identify Legitimate Companies


Ponzi schemes masquerade as legitimate business opportunities, and it can be difficult to determine the difference between legitimate MLM programs and illegal activities. They look very similar. How can you protect your well-being? Ponzi schemes have distinguishing characteristics such as investment opportunities that are not registered with the Securities and Exchange Commission (SEC). These filings can be obtained online by consumers using the EDGAR system (sec.gov/edgar).


Corporate registration gives investors access to information about the management of the company, their products and services, and finances. Furthermore, statutes require investment professionals to be licensed to conduct business. Most Ponzi schemes involve unlicensed practitioners or unregistered companies.


In 2012, the SEC ended a Ponzi scheme nearing financial collapse. The company, Rex Venture Group, raised money for their Ponzi scheme – approaching $600 million in funds – by offering customers monetary incentives in the form of investment contracts. These contracts were not registered with the SEC.


The Inevitable Outcome: Bankruptcy


The company promised to give consumers as much as 50% of daily net profits through a profit sharing agreement where consumers would accrue rewards points that were redeemable for cash payouts. The company recruited prospects on the Internet through a website called ZeekRewards program.


The SEC claimed that the company was on the verge of financial failure. This claim by the SEC stemmed from the fact that ZeekRewards generated $162 million that month while paying out $160 million. If investors continued the trend of redeeming their points, debits would surpass credits and all investors would lose their monies from bankruptcy.

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