Obviously, the easiest way to get scammed is not to participate in a promotion that looks like a Ponzi scheme. Here are some additional tips to help you avoid Ponzi schemes: The distinction between legal and illegal schemes can be difficult to distinguish. Several prominent companies have called themselves MLM organizations, but were later sanctioned for an illegal Ponzi scheme. For example, Herbalife, the once-popular supplement and skincare company, has run into problems. The FTC investigated complaints that it provided misleading information about how much money its merchants could make selling products. The company eventually settled a $200 million lawsuit and was forced to restructure, but it continued to operate. However, some Ponzi schemes disguise themselves as MLM. The Federal Trade Commission warns people to take note and avoid MLM promoters who: Arizona: State law defines a pyramid scheme as a transaction in which participants receive compensation resulting from the participation of others rather than the sale of goods, services or intangibles. Arizona criminalizes “establishing, operating, advertising, or promoting a pyramid scheme.” WinCapita was a Finnish criminal program that amounted to about 100 million euros. The program began in 2005. [63] If someone uses this model as a scam, the trust scammer would take most of the money. They would do this by completing the first three steps (with one, two, and four people) with fake names and making sure they receive the first seven payments at eight times the buy-in amount without paying a single penny themselves. So if the buy-in was $5,000, they would receive $40,000 paid by the top eight investors.
They would continue to buy the real investors and promote and expand the system for as long as possible so that they could siphon off even more before it collapsed. Disguised as a multi-layered marketing opportunity, the Ponzi scheme isn`t always easy to spot, but it`s just as much of a scam as the chain letter. Here are some tips to keep in mind before participating in a tiered marketing program: Ponzi schemes – also known as franchise fraud or chain referral schemes – are marketing and investment scams where a person is offered a distribution or franchise license to market a particular product. The real profit is not made by selling the product, but by selling new distribution companies. The focus on selling franchises instead of the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses. [7] The Airplane Game program resurfaced in 2020 as a savings club called Blessing Loom, Blessing Circle, Sending Flower, Gifting Flower, etc. It is also misrepresented as Sou-Sou, a model of a legitimate savings club where the number of people who deposit into the pot is fixed and each person receives a payment on a regular basis. This differs from the pyramidal variation used by the hierarchical model of the flower,[78] where new members are constantly recruited into the group by people on the edges of the flower.
This reinvention of the old airplane/8-ball model is experiencing a resurgence on social media platforms like Instagram and Zoom. [79] [80] A company`s allegations that its plan was “approved” by the Attorney General of Michigan should be red flags, and you should immediately report such a claim to our office. A company that distorts one fact is likely to distort others. While our office can tell you if we have taken legal action, we will not comment on specific investigations against multi-level marketing companies. In addition, we do not offer prior approval for a business, and if you want legal advice on whether a tiered marketing opportunity is in fact an illegal pyramid, you should consult a private lawyer. A Ponzi scheme is an unsustainable and illegal business model where investment returns usually come from capital gains or membership fees, rather than the underlying investment profits. It is often marketed as a surefire way to turn a small amount of money into large returns. Ponzi schemes are NOT legal. Washington State`s Anti-Pyramid Promotional Programs Act calls it “an unfair or deceptive act in commerce and a method of unfair competition… Multi-level marketing is a method of selling products directly to consumers without intermediaries. Products are sold through a network of distributors or sellers that resemble a pyramid: each merchant recruits and trains additional resellers and earns commissions on their sales, as well as on the sales they make. Because of their pyramid structure, multi-level marketing companies can sometimes be pyramid schemes. Washington State: The Anti-Pyramid Promotional Programs Act targets companies that: Suppose the system`s founder, Mike, sits alone at the top of the pyramid.
He recruits 10 people with the promise of a big return on their money. They are represented by the plane directly below him on the pyramid. A typical Ponzi scheme starts with an initial recruiter attracting investors by promising high returns on their investments. The first recruiter is at the top of the “pyramid”. Once investors hand over their investment money or membership fees to the original recruiter, they become “Tier 1” members. They must recruit a certain number of “level 2” members to make their return. “Level 2” members, in turn, must recruit “Level 3” members and so on. All members must make investments or pay membership fees. The initial recruiter and early investors are paid from investment capital or membership fees by subsequent investors.
As membership increases, the pyramid eventually collapses because subsequent investors are unable to recruit more members. Only the initial recruiter and very few, if any, early investors make money while the others lose money.