Am I in a Ponzi Scheme?

by | May 1, 2019 | Business | 0 comments

Money picture

 Some have asked whether multi-level-marketing (“MLM”) schemes are considered Ponzis. The answer is not simple. Although some MLMs may not be Ponzi schemes under legal definitions, they are often actually Ponzi schemes for all practical purposes.

Some History

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.

What About MLMs?

Are MLMs Ponzi schemes? Regulations differ from state to state, however, the Federal Trade Commission states that an illegal multi-level marketing business is “characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to the sale of the product to ultimate users.” Accordingly, MLMs will contend that their business model is legal as long as it involves the sale of products.  In reality, however, even though it may be technically legal, 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.
Three Step Plan

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.

In Summation

Please visit schedule an appointment with Sam if you want to know more about Ponzi schemes or consumer scams in general.

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 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.  When he is not protecting consumers from scams, he enjoys volunteering in the community and spending time with his family, especially his grandson, Jack. 

Ventola Law serves the Denver Metro area including Arvada, Aurora, Boulder, Brighton, Commerce City, Castle Rock, Golden, Lakewood, Littleton and Arapahoe, Adams, Douglas and Jefferson Counties.

 

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