Watch out for Pyramid Schemes! Some Warning Signs

Warning Signs of Pyramid SchemesHow can you tell if a company is an pyramid scheme, unintentional cash gifting pyramid scheme, or otherwise downright illegal? Well, there is no single authority on the on the subject. There’s not really one single definition either. However, there are certain warning signs that can cause law enforcement agencies to investigate a company. Here are a few warning signs to look for when starting, joining, or even investing in a direct selling, MLM company:

– Promotions where the business opportunity is the product. If no legitimate product or service is being sold, but only the opportunity itself, chances are that the company is operating a pyramid scheme.

Products are sold at inflated prices. Pyramid promoters try to mask their true intentions by selling a product. Often, the product will be vastly over-priced, and unlikely to generate much retail activity. This is a sure tip-off that the real “product” being sold is the compensation opportunity.

Programs that require inventory “loading.” A legitimate network marketing opportunity doesn’t require you to buy unreasonable amounts of inventory to launch your business.

Programs that require substantial initial cash investments. Many states consider $500 or more to be a “substantial” up-front investment. A multilevel (MLM) company requiring such a high investment is likely to attract the attention of law enforcement agencies.

Programs that require the mandatory purchase of peripheral or accessory products or services. Some pyramids seek to hide their true face by charging a minimum price for a “startup” kit, but then compel the participant to buy more expensive items, such as training or demonstration materials. Legitimate network marketing companies sell their business startup kits and selling aids at their cost, or just slightly over their cost.

Companies that don’t  offer a”buy-back” policy. Any company that does not agree in writing to repurchase a reasonable percentage of unsold inventory or unused sales materials from its distributors for a stated time after purchase should be avoided. This is often a sign of a pyramid scheme.

Programs that pay fees for recruiting. A legitimate network marketing company bases compensation on product sales, not recruiting. If money is paid for signing up new distributors rather than for product sales, the business is likely to be a pyramid.

Recruiters who misrepresent earnings. If the opportunity is sold as a “get-rich-quick” scheme, beware! The only people who do well in such companies are those who can sucker others into buying into a criminal confidence game.

You give money, then have your friends give money, and so on. This is a sign of a ponzi scheme. When you give money to a company, it should be for a tangible product or service.

If you want to learn more about the warning signs of pyramid schemes in the direct selling industry, browse the vast collection of articles and videos at, such as this video: Jeff Babener explains the difference between a legal MLM company and a pyramid scheme:


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