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How to Identify an Illegal Pyramid Scheme

Social media has made it much easier for people to stay in contact and reach each other. While this is a good thing in most cases, the easy access social media provides to others allows scammers to open doors that were not as available before. Stories of “huge success” and other pitches can easily draw in people who would otherwise not be tempted.

You might be surprised at how many people get lured into illegal pyramid schemes. The Federal Trade Commission just recently filed a lawsuit against Vemma for running a pyramid scheme that targeted college students. As a result, the FTC posted a few pointers on how to identify an illegal pyramid scheme:

  • Recruitment. If the company pays your income primarily on the number of people you recruit into the program rather than the amount of product you sell, it is a pyramid scheme.
  • You must purchase product. If you are required to purchase the product in order to participate in the program or to stay in good standing with the company, it is a pyramid scheme. In the case of Vemma, the Affiliates were advised they should spend $150 per month on products in order to stay in the monthly “bonus” pool.
  • Promises of wealth. Most pyramid schemes have a recruitment pitch that promises you wealth and a lavish lifestyle. However, only a very small percentage of individuals involved in a pyramid scheme actually make money. In fact, the majority of participants actually lose money.

If you are considering participating in a multi-level marketing company, the FTC recommends that you ask the following questions:

  • What are your annual sales of the product?
  • How much product did you sell to distributors?
  • What percentage of your sales were made to distributors?
  • What were your expenses last year, including money you spent on training and buying products?
  • How much money did you make last year — that is, your income and bonuses, less your expenses?
  • How much time did you spend last year on the business?
  • How long have you been in the business?
  • How many people have you recruited?
  • What percentage of the money you’ve made — income and bonuses less your expenses — came from recruiting other distributors and selling them inventory or other items to get started?

Contact our California Debtor Protection Law Firm with your questions, comments, and concerns, or for a free consultation. Speak to a CA credit card lawsuit and collection harassment lawyer at our firm today.

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