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Multi-Level Marketing or Illegal Pyramid Scheme?
The Attorney General provides Consumer Alerts to inform the public of unfair, misleading, or deceptive business practices, and to provide information and guidance on other issues of concern. Consumer Alerts are not legal advice, legal authority, or a binding legal opinion from the Department of Attorney General.
Multi-Level Marketing or Illegal Pyramid Scheme?
What is the Difference?
or "network" marketing is a form of business that uses independent
representatives to sell products or services to family, friends, and
acquaintances. A representative earns commissions from retail sales he or she
makes, and also from retail sales made by other people that he or she recruits.
Examples of well-known multi-level marketing companies include Amway and Mary
companies call themselves multi-level marketing when they are really operating
pyramid schemes that violate Michigan's Pyramid Promotion Act. Even when a
multi-level plan does not violate Michigan's Pyramid Promotion Act, the
marketing of the plan may violate Michigan's Consumer Protection Act, if the
acts, methods, or practices are unfair, unconscionable, or deceptive.
understandable that consumers often have difficulty telling the difference
between an illegal pyramid scheme and a legitimate multi-level marketing
opportunity. Governmental regulators and the industry continue to debate where
the legal lines are drawn. Multi-level marketing is a lawful and legitimate
business method that uses a network of independent representatives to sell
consumer products. Commissions should only be paid on the sale of goods or
services to non-participant end-user consumers.
schemes claim to be in the business of selling products to consumers in order to
look like a multi-level marketing company. However, little or no effort is made
to actually market the product. Instead, money is made in typical pyramid
fashion...from recruiting other people to market the program. Sometimes,
new "distributors" are persuaded to purchase inventory or overpriced
products/services when they sign up.
Pyramid companies make virtually all their profits from signing up new recruits and often attempt to disguise entry fees as the price charged for mandatory purchases of training, computer services, or product inventory.
schemes are not only illegal; they are a waste of money and time. Because
pyramid schemes rely on recruitment of new members to bring in money, the
schemes often collapse when the pool of potential recruits dries up (market
saturation). When the plan collapses, most people, except the few at the top of
the pyramid, lose their money.
Although pyramid promoters claim that the possibility to earn is endless, this possibility cannot materialize due to market saturation. For example, if a program begins with one person who recruits two people, each one of whom recruits two more people, and so on, in only 28 levels practically the entire population of the United States - every man, woman, and child - would be involved, as is illustrated below.
When investigating a multi-level marketing opportunity, you should ask about market saturation and determine the saturation levels in your area of distribution. Legitimate companies do not have too many distributors in one area.
Pyramid promoters are masters of group psychology. Recruitment meetings create a frenzied, enthusiastic atmosphere where group pressure and promises of a large sum of money play upon people's greed and fear of missing a good deal. Promoters also openly discourage thoughtful consideration and questioning of the scheme. Victims often find themselves tricked into participating. At a recruitment meeting, you might hear phrases like "this is a ground floor opportunity which will change your life", "opportunities don't go away, they go to other people", and "if you act now and work hard for three to five years, you can retire and live off of the residual income." Another warning sign is a confusing compensation plan.
Claims by a
company that their plan has been "approved" by the Michigan Attorney General
should be bright red flags and you should report such a claim immediately to our
office. A company that misrepresents one fact will likely misrepresent others.
While our office is able to tell you if we have taken any legal action, we will
not comment on any specific investigation of multi-level marketing companies.
Additionally, we do not provide any advance form of approval for any company and
if you want legal advice on whether a multi-level marketing opportunity is
actually an illegal pyramid, you need to seek private legal counsel.
form of pyramid scheme is the chain letter that asks the recipient to pay $1.00
or more to each of five names on a list, copy the letter, and then send it out
to new people with the recipient's name added to the list. Many chain letters
claim to be legitimate because they offer a product. Upon close examination,
the product is just a pretense. Often the newsletter simply describes
additional "get rich quick" schemes and may be the only item that new members
"purchase." Alternatively, the newsletter may be offered for "free" to every
new paying member. In either case, the scheme is just a pyramid if it pays
distributors to recruit new members rather than sell a real product to the wider
public. In recent years, pyramid schemes have become more sophisticated, and
many have surfaced on the internet.
Use Common Sense and
Consider These Tips
scheme disguised as a multi-level marketing opportunity is not always easy to
spot, but is just as much of a scam as the chain letter. Here are some tips to
consider before participating in a multi-level marketing program:
If you join a
pyramid scheme disguised as a multi-level marketing program, your decision will
affect not only you, but also everyone you bring into the program. Many people
devote a substantial amount of time trying to market these worthless ventures.
Ultimately, if a multi-level marketing opportunity sounds too good to be true,
it probably is.
FOR GENERAL CONSUMER COMPLAINTS, CONTACT THE ATTORNEY GENERAL'S CONSUMER PROTECTION DIVISION
If you have a general consumer complaint, please file a complaint with the Attorney General's Consumer Protection Division at:
Consumer Protection Division
Toll free: 877-765-8388
www.michigan.gov/ag (online complaint form)
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