Walk Like an Egyptian Away From Pyramid Schemes!

If you’re like me, every time you log into your Facebook or Instagram account, you see friends advertising everything from leggings, to essential oils to nutritional shakes. Most of these ads not only sell products but encourage you to “join our team.” Sounds like a great idea, right?

Not so fast.

Before you get involved with one of these opportunities, makes sure you are not getting involved in a pyramid scheme. How can you tell? The main difference between a pyramid scheme and a multi-level marketing company or MLM, is how you profit.  The FTC defines a pyramid scheme as one where:

  • Your earnings are based on the people you recruit, and the money they pay to join the company, rather than your direct sales
  • You’re required to buy a significant amount of inventory.
  • You’re forced to keep buying things you don’t want or need to keep in good standing with the company.

Most of this definition is based on the “Koscot” test, named for the 1975 FTC decision. In this case, Koscot was a cosmetics company. For a fee of $2000, and a purchase of $4500 worth of product, an individual could attain the level of “supervisor”. They were then encouraged to earn more by recruiting other “supervisors” who made the same investments. In the ruling, the FTC says “The Koscot marketing program was structured so as to maximize recruitment earnings even at the expense of retail earnings.” This decision was affirmed in the 1979 Amway decision, where it was determined that Amway was not pyramid scheme because, “The Amway system is based on retail sales to consumers. (Findings 72- 144) Respondents have avoided the abuses of pyramid schemes by (1) not having a "headhunting" fee; (2) making product sales a precondition to receiving the performance bonus; (3) buying back excessive inventory; and (4) requiring that products be sold to consumers.”

What does state law say about this? Last week, House Bill 329 was introduced in Ohio. We can see echoes of both Amway and Koscot in the bill which defines a pyramid scheme as a “plan or operation by which individuals pay consideration for the chance or opportunity to receive compensation that is derived primarily from recruiting other individuals into the plan or operation rather than from the sale of products or services to ultimate users or from the consumption or use of products or services by ultimate users.”

Bottom line, before you get involved in any business venture, make sure thoroughly investigate what you are getting into. Checking the company's reviews on the Better Business Bureau or Glassdoor is a great way to start.

For more information, check out these resources.

FTC-The Telltale Signs of a Pyramid Scheme

SEC-Fast Answers-Pyramid Schemes

BBB- Opportunity or Scam? Multi-Level Marketing vs. Pyramid Schemes