Some have asked whether multi-level-marketing (“MLM”) schemes are considered Ponzis. The answer is not simple. Although some MLM’s may not be Ponzi schemes under legal definitions, they are often actually Ponzi schemes for all practical purposes.
A Ponzi, named after Charles Ponzi, or pyramid scheme, involves getting people to pay into a system that allows them to profit from others brought in after them, who they are often expected to recruit. Theoretically you can recover your payment or even profit in a Ponzi scheme by obtaining payments from people below you in the pyramid. The problem with all Ponzi schemes is that eventually they run out of victims, and the people who came in later or have not been able to recruit enough new victims will have lost their payment.
Are MLM’s Ponzis? Regulations differ from state to state, but generally a MLM will be considered legal if it involves substantial sale of products and services to people outside the organization. However, an MLM is still a Ponzi for all intents and purposes if success in the venture DEPENDS on bringing more people in. If you are considering getting involved in an MLM ask yourself and the promoters this question: is it realistic to expect this business to succeed by just selling the product? If the answer is no – that you NEED to bring new people in to make any significant amount of money – it’s really a pyramid scheme, even though it may be legal.
One formerly popular MLM you probably have heard about was the “Three Step Plan.” They do not tell you until later into the process that the Three Step Plan is supposed to be about selling mangosteen juice. Now, mangosteen juice may be wonderful stuff, but it is also available from hundreds of sources. If you were interested in buying mangosteen juice, would it make sense to buy it through the Three Step Plan, which involves all the expense of advertising and payment along the uplines? Of course not. If it doesn’t make sense to you as a potential buyer, it doesn’t make sense as a business.
Please visit us at www.samventola.com if you want to know more about Ponzi schemes or consumer scams in general.
Sam Ventola has a wide variety of experience in litigation, legal education, and mediation. He has been an attorney on both sides in business litigation, employment disputes, probate litigation, and personal injury cases. In addition to being an attorney, he has been a mediator, hearing officer, labor relations professor, and lecturer on litigation, employment and First Amendment issues. He has also achieved the rating of AV Preeminent® by Martindale Hubbell.
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