What is a pyramid sale?

Pyramid sales involve schemes in which the right to sell new memberships in the pyramid are sold under the guise of selling a product. Investors make their return not through the sale of the product, but through encouraging others to invest.

Large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new participant pays for a chance to advance to the top and profit from payments of others who might join later.

The mathematical reality is that only early investors recoup their investments.

What should I know about pyramid schemes?

Firstly, they are losers. Pyramiding is based on simple mathematics: Many losers pay a few winners.

Secondly, they are fraudulent. Participants in a pyramid scheme are intentionally or unintentionally deceiving those they recruit. Few people would pay to join if the diminishing odds were explained to them.

Lastly, they are illegal. There is a real risk that any pyramid operation will be closed down by law enforcement and that the participants subject to fines and/or imprisonment. Under West Virginia Code ¶ 47-15-5, violators can be fined up to $1,000.00 and be confined in jail up to six months.

Isn't a pyramid the same as multi-level marketing?

No! Multi-level marketing is a lawful and legitimate business method that uses a network of independent distributors to sell consumer products. Pyramid schemes take on a line of products and claim to be in the business of selling them to consumers in order to look like a multi-level marketing company. However, little or no effort is made to actuallly market the product. Instead, money is made in typical pyramid fashion ... from recruiting. New distributors are persuaded to purchase inventory when they sign up.

How can I tell the difference?

Ask yourself a few questions:

• How much are you required to pay to become a distributor?
  • If the cost is substantial, be careful. The start-up costs in multi-level companies are generally low.
    
    Pyramid companies make virtually all their profits from signing up new recuruits and often disguise entry fees as part of the price charged for required purchases of training, computer services or product inventory.

• Will the company buy back unsold inventory?

• Are the company's products sold to consumers?
  • Multi-level marketing depends on selling to consumers and establishing a market but pyramid schemes are not concerned with repeat sales to users of products.

• Is there a headhunting fee?

• Is product sales a precondition of receiving bonuses?

• Is there a buy-back provision?

• Are 70% of the products required to be sold to consumers at retail?

How can I protect myself from a bad investment?

Take your time. A good opportuity to build a business in a multi-level structure will not disappear overnight. Here again, ask yourself a few questions:

• Are 70% of the products required to be sold to consumers at retail?

• about the cost of the products, their fair market value, the source of supply and the potential market in your area.;

• about the start-up fee;

• about the company's guaranteed buy-back (or lack thereof) of any required purchases.

Also, it is a good idea to get written copies of all company literature. Consult with others and investigate.

Amway 93 F.T.C. 618 (1978)

The F.T.C. found that certain safeguards employed by a direct marketing company are evidence that a business is not an illegal pyramid sales scheme:

• Distributors had to resell 70% of the purchases they made each month.

• A "Ten Customer Rule" that precluded distributors from getting a bonus unless they could certify sales to ten different retail customers each month.

• Amway agreed to refund up to 90% of any unused marketable product from a distributor.

• These safeguards, in conjunction with the fact that all you had to do was purchase a start-up kit for $15.90 is considered evidence that a business is not an illegal pyramid sales scheme.