Charles H. Bronson, Commissioner - LuAnn Stiles, Director

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Multi-Level Marketing vs. Illegal Pyramid Schemes: How to protect yourself from a bad investment.

Multi-level marketing is a popular and legal way of retailing. Consumer products are sold -- not in stores by sales clerks -- but by independent businessmen and women (distributors), usually in customers' homes. As a distributor, you can set your own hours and earn money by selling consumer products supplied by an established company.

In a multi-level structure, you can also build and manage your own sales force by recruiting, motivating, supplying and training others to sell those products. Your compensation then includes a percentage of the sales of your entire sales group as well as earnings on your own sales to retail customers. This opportunity has made multi-level marketing an attractive way of starting a business with comparatively little money.

What is a Pyramid Scheme?

Pyramid schemes are illegal scams in which large numbers of people at the bottom of the pyramid pay money to a few people at the top. Each new participant pays for the chance to advance to the top and profit from payments of others who might join later.

3 Things You Should Know About Pyramid Schemes:

1. They are Losers. Pyramiding is based on simple mathematics; many losers pay a few winners.
2. They are fraudulent. Participants in a pyramid scheme are consciously or unconsciously deceiving those they recruit. Few would pay to join if the diminishing odds were explained to them.
3. They are illegal. There is a real risk that a pyramid operation will be closed down by government officials and the participants subject to fines and possible arrest.

Take Your Time

Don't let anyone rush you into making a decision. A good opportunity to build a business in a multi-level company will not disappear overnight. People who say "Get in on the ground floor" are implying that people joining later will be left out in the cold. BEWARE!

Ask Questions

• Ask about the company and its officers. Do your own research. Find out how long the company has been in business. Call the regulatory agency in the company's home state to inquire about complaints or investigations. Do not assume that official-looking documents are either accurate or complete. Get written copies of all available company literature. Ask the sales presenter for his or her business card. Ask if the person is an employee of the company or someone who is trying to recruit you.
• Ask about the start-up fee, including required purchases. If the start-up cost is substantial, be careful! The start-up cost in a multi-level is generally small (usually a sales kit at cost or below). These companies want to make it easy and inexpensive for you to start selling.

Pyramid schemes, on the other hand, make nearly all of their profits from signing up new recruits. Therefore, the cost to become a distributor is usually high.

• Ask about the product. Find out the cost, the fair market value, source of supply and potential market in your area.
• Ask what safeguards the company has to prevent the operation from becoming a pyramid. Such safeguards include buy-back policies and requiring a certain volume of retail sales before allowing distributors to move up the network.

Pyramid schemes often disguise entry fees as part of the price charged for required purchases of training, computer services and product inventory.

• Ask about sales to consumers. If the answer is no (or not many) stay away! This is a key element. Multi-level marketing, like other methods of retailing, depends on selling to consumers and establishing a market for repeat business. This requires competitively priced quality products.

Pyramid schemes, on the other hand, are not concerned with sales to end users of the product. Profits are made on volume sales to new recruits, who buy the products, not because they are useful or attractively priced, but because they must buy them to participate. Inventory purchases should never be more than you can realistically expect to sell.

• Ask how many other people report to the sponsor you are being asked to join. Get their names and phone numbers. Talk to them about how long they have been in the program and what experiences they have had.

Back to Top	Watch Out for Claims Too Good to be True

If somebody shows you a check for an impressive commission, find out how long they've been in the program and what their average monthly commission has been over time.

Back to Top	Be Wary

Pyramid schemes, in order to look like a multi-level company, take on a line of products and claim to be in the business of selling them to customers. Instead, money is made in typical pyramid fashion -- from RECRUITING. New distributors are pushed to purchase large and costly amounts of inventory when they sign up.

Pyramid schemes often choose products which are cheap to produce but have no established market value, such as new miracle products, exotic cures, health supplements, etc. This makes it difficult to tell whether there is a real consumer market for the products. The best way to avoid a disguised pyramid fraud is to know what to look for in a legitimate income opportunity.

Back to Top	Why Would Anyone Pay to Join a Pyramid Scheme?

Pyramid promoters are masters of group psychology. At recruiting meetings, they create an enthusiastic -- almost frenzied -- atmosphere where group pressure and promises of easy money play upon people's greed and fear of missing a good deal. Thoughtful consideration and questioning are discouraged. It is difficult to resist this kind of appeal unless you recognize that the scheme is rigged against you.

Back to Top	Warning Signs

There are certain warning signs that should cause potential investors to look more closely at the offer. Any of the following should alert the potential investor to be extremely wary and reconsider any deal before proceeding:

• Pressure to sign a contract immediately.
• Promises of extraordinarily high or guaranteed profits.
• Claims that profits can be achieved easily or with little work or time investment.
• A required initial investment that greatly exceeds the fair market value of any products, kits or training.

These are only warning signs of the most obvious frauds, but they indicate a need for further investigation before committing any money.

Florida residents who have questions about a multi-level marketing company, or would like to request a complain form, call The Florida Department of Agriculture and Consumer Services' consumer hotline at 1-800-HELP-FLA (435-7352). Out-of-state residents may call 850-488-2221.