When Does a Multilevel Marketing Businesses Become an Illegal Ponzi Scheme?
White-collar crime does not always happen intentionally. For some, they find themselves on the wrong side of a deal that sounded too good to be true. Some sign up for an apparently legitimate business, only to end up immersed in a pyramid or Ponzi scheme.
Regardless of your intent, being charged with a white-collar crime can cost you millions in penalties and even land you in prison. If you frequently explore new business ideas or invest in new companies, knowing the difference between legitimate businesses and illegal schemes is essential.
Are you facing charges for fraud or another white-collar crime? We’re here to help. Call Kirk Drennan Law at 205-803-3500 to schedule a consultation now.
The Differences Between MLMs, Pyramid Schemes, and Ponzi Schemes
The terms multilevel marketing, pyramid schemes, and Ponzi schemes are often thrown around interchangeably. However, there are distinct differences, and those differences determine whether or not a business is legal.
- Multilevel marketing. This type of business involves signing up with a company as an independent contractor to sell products and recruit additional contractors. Participants are paid based on their sales and the sales of their recruits. Participants are generally paid through multiple levels of their downline.
- Pyramid schemes. A pyramid scheme generally gives participants the opportunity to earn money based on their recruits only. They may be paid a set fee per recruit or have to recruit a certain number within a specific timeframe to be paid. There is no product involved in a pyramid scheme, or the product is of such minimal importance that it is irrelevant.
- Ponzi schemes. Participants are paid returns on their initial investment with funds from those who invest later than them. At some point, the person running the scheme cannot bring in further participants, and those who have not yet been paid their returns lose everything they put in.
When an MLM is No Longer Just an MLM
One of the main questions that come up is, “When is a multilevel marketing company actually a pyramid scheme?” To start, an MLM is not a pyramid scheme if a legitimate product is being sold. This does not mean, though, that any company that sells a product or service cannot be a pyramid scheme.
If the FTC believes that the product or service is inconsequential and only exists to cover up the recruiting portion of a business, the MLM may still be considered a pyramid scheme. For example, the product may be of low value, yield few sales, or only be of interest to those who are also involved in the business as a recruit.
There are some warning signs to watch out for. If an MLM pays substantially more for recruiting than it does for making sales, it may be veering into pyramid scheme territory. If no one outside the business uses the products, the business is essentially a closed-loop, and money from new recruits is simply being paid to those in their upline.
If a company pays people based on their downline’s purchases rather than their downline’s sales, that could also be worrisome. Legal MLMs (who have had this issue) have had to restructure their commission systems in the past to avoid the FTC shutting them down.
Consequences of Being Involved with Ponzi or Pyramid Schemes
Those involved in Ponzi schemes or pyramid schemes face serious financial and societal consequences. In 2008, Bernie Madoff was busted for using a Ponzi scheme to defraud clients. For his multiple federal convictions, he was sentenced to more than 100 years in prison. Those convicted of investment fraud face prison time, civil penalties, and forfeiture of assets acquired through their illegal activity.
Choose Kirk Drennan Law for Your Criminal Defense
If you’ve gotten caught up in a Ponzi scheme or pyramid scheme, you may wonder what your future holds. The fact is, it’s never too soon to hire an attorney if you believe you are under investigation. The government gathers substantial evidence before bringing charges against an individual, so by the time you’re charged, they may already have a solid case against you.
The sooner you have an attorney on your side, the better off you are. Schedule a consultation with Kirk Drennan Law now by calling us at 205-803-3500 or reaching out to our team online.
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