Many people confuse predatory pyramid and Ponzi schemes with legitimate multi-level or network marketing programs. Tasked with protecting consumers from deceptive and misleading practices that negatively impact the free market, the U.S. Federal Trade Commission (FTC) will periodically make a proactive attempt to educate and inform the public about the key differences.
It’s unfortunate, but as each new generation of potential victims for these kinds of illicit marketing schemes comes of age, the job of protecting the public from them yet once again must and does ramp up. Add to that the fact that today’s technology has made it far to easy to reach people in their own homes with these kinds of shady opportunities promising huge profits for really doing a whole lot of nothing, and the FTC’s job gets that much harder.
With a nod to the FTC and in support of its effort to educate and inform people who are shopping for a business opportunity, distributorship, licensee opportunity or franchise, here are some quick facts and hints about what you need to know and look out for when it comes to pyramids, Ponzis and other predators:
- Pyramid schemers promise you large profits based primarily on your recruitment of others to join the program, not on profits generated by the sale of any real tangible product or service to the general public.
- While some pyramid schemers claim to sell a product or service, it’s only to hide their true pyramid structure.
- Two tell-tale signs that you’re dealing with a pyramid schemer: 1) Inventory loading that forces you to buy more than you could ever sell, oftentimes at hugely inflated prices; and 2) Lack of retail sales or “huge” sales that, on closer examination, are only going on among people who are already within the pyramid structure, not to the general consuming population.
- Ponzi schemers also rely on continuous recruiting, but in a different way. They generally have no product to sell and don’t tell you that you can earn money by recruiting others. Rather, they collect payments from a stream of people under the guise of a phenomenal investment opportunity and promise a huge rate of return on their investment. Then they go on to “rob Peter to pay Paul,” as the saying goes, using the money invested by later victims to pay off earlier ones, until they can’t anymore. Think Bernie Madoff and the ultimate Wall Street swindle that wrecked so many lives not too long ago.
- Both pyramid and Ponzi schemes are deemed to be predatory in nature. They are also highly illegal because, without fail, they must and do fall apart, leaving 70% or more of those that get drawn into their web at the bottom of the pyramid and having suffered what can oftentimes be a significant financial loss.
To avoid getting caught up in one of these scams, the FTC recommends that consumers and businesses follow these six key tips:
- Any plan that makes exaggerated earnings claims, especially where there seems to be no real product sales or investment profits, should raise a red flag.
- BEWARE of any business or franchise opportunity that offers commissions for recruiting new participants, especially when there is no apparent product involved and/or there is a separate, up-front membership fee. And just because there may be a product or service represented does not mean all is well. The FTC has seen pyramids operating behind the guise of many a seemingly legitimate operation, including everything from charity benefits and jewelry to cosmetics, cleaning supplies and even women’s underwear and electricity, of all things!
- If the product or service being sold has an inflated price tag, members must buy costly inventory or most sales occur between people who are already members, that’s a problem.
- If any business claims to have a secret plan or approach that only the higher ups and/or members can know about or there’s some mysterious overseas connection or any other special relationship that is unverifiable, run!
- Beware any operation that delays meeting its commitments and asks its participants to just have faith that things will improve. Being in “pre-launch” mode IS NOT an excuse, as most operations that make that claim never do get off the ground. Attempts to marginalize outsiders who question the opportunity and then label them as skeptics while promoting a sense of community and solidarity within should also be troublesome to you. This is a commonly used tactic to recruit and retain victims.
- Any opportunity that implies overnight wealth can be yours thanks to the public’s interest in high-tech or by tapping into newly deregulated markets where pyramids and Ponzis are legit is most likely a sham if not a scam. Even the most legitimate high-tech ventures are risky and become profitable only with time and years of hard work. Additionally, deregulation rarely means that no rules apply such that pyramid and Ponzi schemes are suddenly okay.
When you’re shopping for just the right entrepreneurial venture, make sure you watch out for these important clues or indications that something just isn’t right. Do your homework and educate yourself on what constitutes a legitimate opportunity and what doesn’t. If you don’t, you run the serious risk of getting in over your head and paying a huge price for it down the road.