Home
Office Computing Magazine
Identifying
Illegal Pyramid Schemes
By
Jeffrey A. Babener
The last
thing you want to do is become part of a multilevel
system that is, in reality, an illegal pyramid scheme.
According to the Direct Selling Education Foundation, a
pyramid scheme is an illegal scam "in which large
numbers of people at the bottom of the pyramid pay money
to a few people at the top. Each new participant pays for
a chance to advance to the top and profit from payments
of others who might join later."
Both MLM and
pyramids have multilevel payment systems, but that is
where the similarity ends. Network marketing is a legal,
ethical manner of doing business. Pyramids are illegal,
fraudulent con games. In MLM, you are a legitimate seller
of a product or service and business opportunity. In a
pyramid, you are a crook.
But how do
you tell them apart? Jeffrey Babener, a network-marketing
legal expert and attorney based in Portland, Oregon,
states that there is no single authority on the subject;
state and federal authorities have different ways of
looking at the issue. However, in his book The Network
Marketer's Guide to Success (written with David Stewart:
Legaline Publications, 1990), Babener and Stewart have
identified red flags that may cause law enforcement
agencies to investigate a business:
- Promotions
where the business opportunity is the "Product".
If there is no legitimate product or service
being sold, but only the opportunity itself,
chances are, the promotion is a pyramid scheme.
- Products
that are sold at inflated prices.
Sometimes pyramid promoters try to mask their
true intent by selling a product. Often, the
product will be vastly overpriced and thus
unlikely to generate much retail activity,
thereby indicating that the real item being sold
is the compensation plan.
- Programs
that require inventory "loading".
A legitimate MLM opportunity doesn't require you
to buy unreasonable amounts of inventory to begin
your business.
- Programs
that require substantial initial cash investments
. According to Babener, many states
consider a required up-front investment of $500
or more to be "substantial" and thus
likely to attract the attention of law
enforcement.
- Programs
that require mandatory purchase of peripheral or
accessory products or services. Some
pyramids seek to hide their true face by allowing
a minimum price for a "start-up" kit
and then compelling the investor to buy more
expensive items such as training or demonstration
materials. Babener believes that business-start-up
kits and selling aids should be sold at company
cost.
- Companies
that don't "buy back".
According to Babener, "Any plan that does
not agree in writing to repurchase a reasonable
percentage of unsold inventory or unused sales
materials for a stated time after purchase should
be avoided."
- Programs
that pay fees for recruiting. "A
legitimate MLM opportunity will have compensation
based on product sales and not on recruiting,"
Babener states. If money is paid for signing up
new distributors rather than for product sales,
the business is likely to be a pyramid scheme.
- Recruiters
who misrepresent potential earnings.
If the opportunity is sold as a "get-rich-quick"
scheme, beware. The only people who do well are
those who can sucker others into buying into a
criminal confidence game.
Jeffrey
A. Babener, a partner in the Portland, Oregon,
law firm Babener
& Associates, represents many of
the leading direct selling companies in the
United States and abroad.
|
Back