Blog

The information provided on this post does not, and is not intended to, represent legal advice. All information available on this site is for general informational purposes only. If you need legal help, you should contact a lawyer. You may be eligible for our free legal services and can apply by calling our Covid Legal Hotline at 1-844-244-7871 or applying online here.

Pyramid and Ponzi Schemes versus Multilevel Marketing (MLMs)

MLMs and Ponzi/pyramid schemes often seem similar, however there are minor differences that distinguish them.

What is a Pyramid Scheme?

Pyramid schemes usually promise large profits primarily mainly from recruiting others to join the “program”.  Profits are not based on any real investment or sale of goods.  Recruits are often encouraged to buy more products to sell than they could ever sell.  They may be few actual sales.

A Ponzi scheme is very similar to a pyramid scheme, however in a Ponzi scheme there is no product. Ponzi schemes are often called “Peter-Paul” scams because there is no real investment opportunity.  The promoter uses money from new recruits to pay the benefits promised to earlier recruits.  Promoters in Ponzi schemes will often use high-pressure sales tactics to get you to join. They may emphasize that you will lose the opportunity if you don’t act quickly.

What is MLM?

In Multi Level Marketing (MLM), companies sell their products or services through person-to-person sales. Sellers also bring in new sellers.  When a new seller sells something, those higher up the chain gets a cut.

What’s the difference?

A MLM will not require you to recruit others to be paid.

How can I figure out if a company is a Ponzi scheme?

Researching the company, researching what others are saying, considering the products the company offers, understanding the costs of joining, asking about refunds, and reading the paperwork can all help avoid schemes.

If I was victim to a Pyramid or Ponzi Scheme, what should I do?

If you have information of a possible Ponzi or pyramid scheme, or if you have fallen victim to either of the schemes, you can file a tip to the SEC here. You can also leave a tip by phone with the FBI at 1-800-225-5324.

The IRS offers some relief to victims of these schemes through special tax rules. Investors in Ponzi schemes are entitled to deduct their losses as a theft loss, an itemized deduction, during the year the fraud is discovered.

You should also contact your local police department and file a complaint.

For more information visit the Consumer Information page on the FTC website.