MLMs vs. Pyramid Schemes: One Is Legal, But the Other Could Land You in Prison

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MLMs vs. Pyramid Schemes: One Is Legal, But the Other Could Land You in Prison

With the rise of social media, multi-level marketing (MLM) companies have been cropping up all over the place. Given the success of your high school buddy or your favorite influencer, the thought of joining an MLM to make some money might have crossed your mind. 

However, the line between a pyramid scheme and a multilevel marketing company can be very thin. The biggest difference is legality—while MLMs are legal, participating in a pyramid scheme is a crime. Making sure you are joining a legitimate business and not a scam is the best way to protect your future. 

What Is a Pyramid Scheme? 

By definition, a pyramid scheme is a fraudulent marketing company that relies on recruits to make money. The people at the top of the pyramid are the ones who make the most money, while those at the bottom lose money. Pyramid schemes fail when they run out of people to recruit, or when they are shut down by law enforcement. 

Pyramid schemes claim that the more recruits you bring in, the bigger your revenue will be within the company. They may offer things like money, cars, expensive vacations, or jewelry if you meet certain goals involving recruitment. Looking closely at a company will reveal whether they actually care if their products or services are making it to customers or if their main focus is on recruitment. 

While they may look legitimate on the surface, pyramid schemes only work by gaining new recruits who will buy into the company. For example, they might have to pay a registration fee or buy mandatory startup kits. Along with starting costs, there are often yearly or monthly fees involved, or products that must be repurchased regardless of the amount that you already have on hand. 

Are Ponzi Schemes and Pyramid Schemes the Same?

While similar in style, the main difference between the two schemes is that Ponzi schemes tend to revolve around fraudulent or nonexistent investments. Rather than recruiting people to sell products or services, they rely on new investors to pay themselves and other investors. They are named after Charles Ponzi, who swindled nearly 20 million dollars from Boston investors in the 1920s. 

How are MLMs Different from Pyramid Schemes? 

Multi-level marketing companies (MLMs)  rely on marketing directly to consumers. This means that rather than having their products in brick-and-mortar stores, they are only available for purchase through an agent. Some of the most famous multi-level marketing companies (like Avon and Tupperware) have been around for decades. 

In many ways, MLMs are very similar to pyramid schemes. They also rely on recruitment, with people at the top making the most money. They might charge fees to new recruits who join, or have mandatory quotas of products to buy. However, as long as an MLM makes more than 70% of its profits from selling its products or services, it is considered a legal business. 

Pyramid Schemes Are a Class 6 Felony

Starting, running, or promoting a pyramid scheme can land you in prison. Often the people who are punished criminally are those who started or have been promoting the scheme from the start. 

In Arizona, running a pyramid scheme is a class 6 felony. Prison time for convictions ranges from as little as 3 months to over 5 years. Along with prison time, you could also face probation, fines and restitutions, and the loss of some civil rights. 

Criminal Defense Attorney in the Phoenix Area

If you are being charged with running a pyramid scheme, contact a lawyer immediately. A class 6 felony could change your entire life, and not for the better. Todd Coolidge has over 25 years of experience as a criminal defense attorney in Arizona. Contact us today for a consultation that could help you keep you out of prison.


Images used under creative commons license – commercial use (2/10/23). Photo by Michael Dziedzic on Unsplash.