March 22, 2017
Recognizing a Pyramid Scheme is crucial in avoiding the chance of losing your money to a fraudulent business or investment scam. Here are 6 simple questions you can ask yourself before becoming involved in a company and to decide if it is a legitimate opportunity or a pyramid scheme:
- Has the company been in business for a long time, and if so, do they have a good reputation?
- Do I personally know anyone that has participated in the company? If so, what has their experience been?
- How do the risks compare with the potential rewards?
- Is the compensation plan easy to understand?
- Is the company licensed? If so, is it with reputable companies or organizations?
- If the company sells products, are the products exclusively available to those who pay for a membership and begin recruiting others?
Business Credentials and Reputation
Most fraudulent companies can only get away with their crimes for so long until the FTC catches wind of it. If the business has been operating for more than a few years, that is a good sign. Certain MLM companies have been around for a very long time and have remained in good standing with the FTC. You can even visit the scam alerts section of the FTC website and search a particular company. For example, you could input “is Kayani a pyramid scheme” and you will see that nothing comes up. Yet if you search “Herbalife” you will see several articles about their recent settlement.
Check to see what sort of credentials the business has or any affiliations it has made. If the business is registered with the Direct Selling Association or the Better Business Bureau, those are good signs. Pyramid scheme MLM companies usually won’t take the time to register with affiliations as that is the time they could be using to scam and sell before they get shut down. Regulatory agencies that review direct selling businesses will routinely investigate the business to make sure that they are adhering to the appropriate guidelines and regulations for the industry.
Look at online reviews and see what people are saying about the company. Try to look for any indications of fraud or people being tricked into signing up. It is important to take certain reviews with a grain of salt as people are more likely to post negative reviews online rather than positive. Pay less attention to the score or rating given by review sites and more to what real customers or distributors are saying. Or if you know someone who is involved in the company, and you trust their opinion, ask them what their experience has been like and if it has been a worthwhile experience.
Risk vs. Reward
Some companies may require a significant investment to join. Others don’t require any sort of upfront purchase or membership fee. Do your homework and decide if the initial investment and any other expenses are worth it. Ask the questions you need and don’t commit to anything until you get all of your answers.
Research what kind of income you can expect to make based on the average income of other people who have joined the company. MLM companies are required to share an income disclosure statement on their website in order to be transparent with the public regarding what percentage of distributors earn a commission and how much that commission is on average. Set realistic expectations for yourself, as there truly is not a “get rich quick” scheme out there that actually works.
What to Do If You Think It’s A Pyramid Scheme
If you went through all 6 questions and suspect a Pyramid Scheme, steer clear of whatever company or investment opportunity being presented to you. If you are involved in a company that seems to be a pyramid scheme, it may be wise to strategically withdraw your money and exit the company before it is too late. Additionally, make contact with the SEC to alert them of the possible fraudulent activity.