“Gain bigger profits with minimum effort just by investing a little amount.” Doesn’t this sound interesting?
You must have come across opportunities like these quite often. Although these words promise you big things, you must be careful because they are just another scam to steal the money you have worked so hard to earn.
Today, we will provide you with deeper insight into three of the most common schemes out there and how you can identify which one is legitimate.
Before diving further into how the Ponzi, Pyramid, and Multi-Level schemes differ from each other, let’s go through the basic concept of each of them:
What is MLM? Multi-Level Marketing
Multi level marketing or MLM scheme is a marketing approach in which companies promote their products through distributors and give numerous levels of pay. There is a legitimate product being marketed, and investors are actively looking for people to assist them in selling it. As an incentive, people receive a share of such sales.
What is a Pyramid Scheme?
A pyramid scheme repays its investors by persuading them into recruiting more people for the organization. In most situations, the active goal is to keep recruiting, and the focus is not on selling any kind of product. Usually, the recruiters of pyramid schemes offer large profits without any sale goals to innocent people in exchange for their services.
What is a Ponzi Scheme?
This scheme, named after Charles Ponzi, who developed it in the early 1920s, revolves around fraudulent investments. Only the original supporters and investors are typically repaid or profit from a Ponzi scheme. An ever-increasing flow of money from new participants is required for the program to continue and pay out the promised profits. In short, only early investors are able to profit by accepting fresh investments.
How Do These Schemes Work?
To further understand the differences between the three schemes, you must know how they work:
⦁ The fundamental principle behind the MLM approach is to promote the product to as many distributors as possible in order to exponentially build the sales force. The promoters receive a commission on product sales as well as money for sales made by their recruits. Thus, in multi-level marketing, the compensation plan is structured in such a way that commission is paid to individuals at various levels when a single sale is made, and the commission is based on the overall number of sales created.
⦁ In the case of pyramid schemes, money is paid only for registering others in the plan, with no actual product being offered. Only a few people (sitting in the top management) profit, and when no new persons can be recruited, the scheme fails, and most promoters, except for the top ones, lose money.
⦁ Another fraudulent investing strategy is when companies that operate a Ponzi scheme spend all of their efforts persuading new clients to make investments. This additional revenue is utilized to pay out original investors’ returns, which are labeled as a profit from a valid transaction. Ponzi schemes rely on a steady stream of new investments to continue providing payouts to older investors. When this flow runs out, the scheme collapses.
Are These Schemes Legal?
Multi-level marketing schemes are legal. However, there are several exclusions that classify certain multi-level marketing companies as illegal because they maliciously seek to mislead customers. You can know an MLM company is legal when:
⦁ Tangible products or services are sold to customers.
⦁ Commissions are given on product sales rather than enrollments.
⦁ The organization buys back inventory from participants at the point of termination.
On the other hand, both Ponzi schemes and the majority of pyramid schemes are unlawful under government restrictions. This is mostly due to the deception involved in acquiring new investors, as well as the fraudulent reports and audits that are frequently filed with regulatory bodies such as the Securities and Exchange Commission (SEC). Many countries have declared them illegal and strict action is taken against those who participate in them.
Ponzi Scheme vs Pyramid Scheme vs MLM
Regardless of legal status, it is essential to know that many people have lost money as a result of their participation in MLM companies too. Thus, it is crucial for everyone to research thoroughly before taking part in any schemes so that you don’t end up unknowingly scamming others or losing your hard-earned money in the process.