Pyramid SchemesFor the most part when you hear about scams, they involve one stranger trying to take advantage of another stranger — such as fake moving companies that try to take advantage of people in the frenzy of a big move or email scammers hoping to trick people into clicking links from emails that land in their inboxes. Unfortunately, there’s one type of scam that relies on the ability of its victims to call upon their friends and family members to perpetuate itself. This scam is popularly known as a pyramid scheme, and while pyramid schemes are illegal, a legal business mode known as multi-level marketing programs carries some similarities (and some businesses claiming to be multi-level marketing (MLM) programs have, in fact, been nothing more than pyramid schemes in disguise). MLM programs are thriving these days thanks to the global connectivity of social networks like Facebook. Before people buy into the hype of an MLM program, it’s important for them to understand the basics of pyramid schemes and what to look for to ensure they aren’t getting sucked into something that will cost money and time without any actual profit.

What is a pyramid scheme?

These scams are nothing new, and in fact have been around for over a century. At its most basic, a pyramid scheme is designed so that the people at the top make money a lot of money through the method of recruiting other people, who are then pressured to recruit even more people. The premise is seemingly simple: You make a small investment (i.e., $500) and then recruit five more people who each make a $500 investment. The person who recruited you gets some of the money you put in, while you get some of the money the people you recruited put in. These scams are dangerous because they promise instant, high returns in exchange for no real work other than handing over money and recruiting more people.

pyramid scheme

Chart by the SEC showing how pyramid schemes work.

Following the shape of a pyramid, it’s rare for these schemes to make any significant amount of money for anyone other than a few people who make up the very top of the scheme. Although products and services may be a part of the investment incentive, the money received is only used to pay off those who have invested beforehand, and so on. These days, pyramid schemes are often disguised as MLM programs and pitched as an easy way for people to make money from home, usually by selling products or services online. Social networks like Facebook have made these schemes possible to spread further than ever before. While many successful MLM programs are a legitimate, if somewhat unreliable method for people to make some money, there are some which are nothing more than pyramid schemes designed to take advantage of hopeful entrepreneurs.

Why are these schemes so popular on social media?

MLM programs, and pyramid schemes with them, have made a comeback in recent years thanks to social media networks, especially Facebook and Instagram. These social networks enable individuals to connect with thousands of people all over the world, making them an ideal place to market products and services. This also makes them the perfect hunting ground for pyramid schemes operating as MLM programs to recruit and take advantage of people. Hashtags on social networks can further be used to connect people, and Facebook’s groups and pages feature lets people set up their own space online to pressure others into buying from them either directly or by posting a continuous stream of advertisements. It might be tempting to buy into the hype, especially if you’re hearing about great work-from-home opportunities from someone you know, but since pyramid schemes are designed to fool others, it’s important to know how to spot a scam when you see one.

How can I tell the difference between an MLM program and a pyramid scheme?

The SEC has posted a guide to spotting a pyramid scheme disguised as an MLM program to help people determine whether they’re getting swindled before they invest time and money into a sales program. A few key things to watch for include:

No genuine product or service. A true sales job with an MLM program is based around selling an actual product or service, but pyramid schemes masquerading as MLM programs will often not have any legitimate product to be sold. If you’re promoting an idea or the product you’re asked to sell seems to be inappropriately priced for what it is, be on your guard. You should also do some research into how profitable the company is — has it made any real revenue from its product/service sales? How much does the average salesperson make per month or year? These questions should be easily answerable by either your recruiter or someone in the program’s upper management. If you feel as though you are being dodged when you ask questions, take that as a cue that things aren’t what they seem.

You’re required to “buy in” to start selling. Many MLM programs require consultants to purchase a starter kit of items that they must first sell to make money. This is something to be skeptical about, as a heavy focus on purchases made by salespeople recruited by program participants can be an indicator of a pyramid scheme. A program that requires you pay a monthly or yearly due in order to sell its products is also something to be wary of, as well as those which require lengthy training sessions or seminars that you have to pay for out of pocket. If you’ve already paid money for a starter sales kit and wish to opt out, be sure to read the fine print and find out whether discontinuing your participation will allow you to keep the items you’ve purchased or not.

Promises of easy money and fast returns. Get rich quick schemes are always something to regard with suspicion, as they are usually scams. Any MLM program that promises participants will make a lot of money in a short period of time, especially if little work is involved, is probably not all it’s cracked up to be. The classic hallmark of a pyramid scheme involves luring in others with the guarantee of a lot of money quickly, with the goal of each additional person making money for the people at the top. However, this model is not sustainable without actual products to sell, and it’s unlikely that any business which promises you’ll get high returns without doing much work at all is legitimate.

Recruitment is emphasized over sales. If the bigger incentive is to recruit more people to become consultants and pay into the program, versus the sale of products and services, you should be on the lookout. Additionally, if you aren’t sure exactly how you’ll be getting paid or the commission structure is complex or based more around recruitment than sales, it’s best to avoid getting involved.

It can be easy to get sucked into something when people you know are excited about it, and often those involved with social media-led pyramid schemes or dubious MLM programs make money solely by appealing to the sympathies of their friends and loved ones. Don’t buy into the hype, and don’t let people play upon your emotions if you find something to be suspicious. Do your research and trust your instincts — if something seems too good to be true, it probably is. Learn more about avoiding all types of scams by following our scams blog.