The top ten famous pyramid schemes listed below all have one thing in common: they’re multilevel marketing companies designed to give benefits to existing members for recruiting new members.
This type of business structure is completely legal, though there are many advocates against it. In fact, some of the companies have been investigated by the FTC and fined, but specifically not called a pyramid scheme.
However, others have swindled people out of money and have been shut down by the government. Continue reading to learn about the difference, how to avoid falling for the scam, and the top ten famous pyramid schemes of all time.
What Is a Pyramid Scheme?
A pyramid scheme is a business structure that pays more for recruiting new members or distributors than it does for selling actual product. Each of these new members usually pay an entrance fee, which is used to pay the people above them.
Pyramid schemes are considered illegal because there’s more emphasis placed on recruiting than on selling actual products to consumers.
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Difference Between Pyramid Scheme and Multi-Level Marketing Company
Multi-level marketing companies (MLMs) are legitimate businesses with the goal of moving products to consumers. If new buyers aren’t already members of the MLM company, you can sign them up and earn a percentage of the income they generate.
On the other hand, in a pyramid scheme, the income usually comes from recruiting new members who must pay an entrance fee or startup cost, which is used to recruit new members.
At MLMs, there are benefits to recruiting new members, such as earning a commission of their sales. However, the main goal of the organization is still to move product.
Some have suggested that all MLMs are pyramid schemes because of the structure and because most distributors end up buying the product rather than consumers. But the FTC has ruled that MLMs are legal business structures.
Top 10 Famous Pyramid Schemes
Remember, not all pyramid schemes or MLMs are scams. For instance, some of those on the list below are legitimate companies that have a loyal following and continue to grow.
However, before signing up, joining, or accepting a job at any of these companies, be sure to do your research to find out if it’s a good fit for you and your lifestyle.
Many of these companies promise unlimited earning potential and incentivize you for bringing in new members. So, if you don’t feel comfortable with the company and product, you’ll have a tough time trying to sell it to your family and friends.
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#10: Mary Kay Consulting
While the company has never confirmed or denied that it had been investigated by the SEC, according to a 2012 article in Harper’s Magazine, Mary Kay avoids being classified as an illegal pyramid scheme because of very specific language.
For instance, the company doesn’t require that it’s salespeople buy inventory, but there are benefits to doing so. And, the FTC says that receiving commissions based on actual product sales is legal.
However, according to the article, “the majority of sales occurred between company and salespeople” and not the consumer.
#9: Business in Motion
During the height of the Great Recession, Business in Motion offered Canadians an easy way to earn $100,000 a year by selling “dirt cheap” vacation club packages. To join, new members had to pay a $3,200 entrance fee, but they would receive a $5,000 commission for every package sold.
That was the first red flag that ultimately doomed this company, because investigators wondered how they could offer a commission higher than the actual cost of the product.
A group of about 2,000 investors were duped by this scheme and were awarded a total of $6.5 million. In addition, the man behind the scheme, Alex Klippax, could face deportation back to the U.K.
#8: United Sciences of America
Created in the 1980s, United Sciences of America preyed on the health risks of the time and promised to protect people who took their supplements from HIV and cancer. They even had a celebrity endorsement from William Shatner.
However, NBC News ran a story about the company’s fraudulent claims and sketchy advertising. Plus, the company’s 16-member advisory board were paid consulting fees, and some were given $100,000 research grants.
In 1987 three states told the company to change their claims which quickly led to high profile advisory board members leaving and the company disintegrating.
#7: BurnLounge, Inc.
Founded in 2004 at the height of illegal downloading, BurnLounge offered 30,000 people, including major label musicians, the option to open a storefront to sell songs through a website.
However, unlike other streaming sites, such as MySpace and PureVolume, new owners were required to pay a subscription fee and made money by recruiting new members. And, those who sold songs were paid in points that could be redeemed for BurnLounge products only.
Of course, you could exchange your points for real money if you paid the associated fees.
#6: USANA Health Sciences
In 2007, USANA Health Sciences released that it was the subject of an informal investigation by the Securities and Exchange Commission after Barry Minkow, a convicted felon-turned-fraud-buster, penned a 500-page report alleging that the company was a pyramid scheme.
As a multi-level marketing company, USANA only sells its products through distributors. While distributors can sell their products to anyone, they earn a much higher profit by recruiting other salespeople and getting a share of the revenue.
Both the SEC and the FBI spent time investigating USANA, and in July 2008, the company reached an undisclosed settlement of its lawsuit against Minkow. To this day, the company remains active.
#5: Fortune Hi-Tech Marketing
Deemed a pyramid scheme in 2013 by the FTC, Fortune Hi-Tech Marketing recruited people to sell products made by Dish Network, cellphone providers, Frontpoint Home Security, and health and beauty products.
However, salespeople earned more money from recruiting than they did from selling.
Roughly 100,000 Americans were affected, who paid between $100 and $300 in annual fees, as well as some who paid additional money for sales commissions and recruiting bonuses.
In August of 2015 the FTC alleged that Vemma, producer of energy and weight loss drinks, was operating a pyramid scheme that offered greater rewards for recruiting new members than it did for selling product.
New members, usually college students and other young people who were promised high compensation, had to pay $600 for starter packs and hundreds more for monthly product. As a result, according to the FTC, most participants lost money.
In fact, 93% of Vemma distributors earned less than $6,169 annually according to 2013 publicly available data.
#3: Nu Skin Enterprises
In the 1990s, Nu Skin Enterprises was investigated by the FTC and several states. In order to settle all cases, the company ended up paying $2.5 million to the FTC over two years.
The Connecticut Attorney General said that nearly 9,000 Connecticut residents became distributors for the company between 1988 to 1991 and bought roughly $11 million in inventory. However, these distributors were designed to be rewarded for recruiting new distributors rather than selling products.
In 2014, the company was again investigated, this time in China, though it was cleared of being called a pyramid scheme.
In 2016, the FTC avoided calling Herbalife a pyramid scheme. However, they did conclude most of the company’s sales leaders were earning as little as $5 a month and did warn that the company would need to prove that its business model is legitimate going forward.
This was considered a victory for Herbalife, who has faced many allegations in recent years, mainly from Bill Ackman, an investor who very publicly shorted the company’s stock. But it also included a Belgium ruling that the company is an illegal pyramid scheme.
In addition, the company faced a class-action lawsuit by former and current distributors in 2004.
However, some reports have said that distributors who received a portion of the $200 million fine in 2016 were actually loyal customers and used some of the money to buy more Herbalife products.
In 1979 the FTC decided Amway was not a pyramid scheme because distributors were not paid specifically for recruiting new salespeople, just a commission on the products new distributors bought.
This was a landmark case by the FTC and set the precedent of determining what kind of structure is considered a pyramid scheme and what is considered a legitimate MLM company. However, the FTC did force the company to make certain changes.
Even more recently, Amway settled a class-action lawsuit filed with federal district court in California $100 million, including even more changes the company must make to its business model. However, the FTC has ruled that the company’s distributors are selling the products to real customers and not just other recruits.
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Difference Between Ponzi Schemes and Pyramid Schemes
A Ponzi scheme is similar to a pyramid scheme in that new members end up paying existing members. However, in a Ponzi scheme, there is no product to sell. Instead, a Ponzi scheme is an investment account where earlier investors earn a return as new investors join and contribute to the fund.
Another difference is that there is no direct reward for recruiting new members, as existing members aren’t paid a commission. Instead, members recruit new members because of the incredible return on their initial investment.
Therefore, a Ponzi scheme is centralized as opposed to pyramid schemes, which continue feeding money up.
How to Recognize a Pyramid Scheme
One of the best ways to avoid falling into the trap of some of these famous pyramid schemes is to recognize the key attributes. For instance, if you have to buy inventory or if you receive better benefits for recruiting new members or distributors than selling actual product, than it is probably a pyramid scheme.
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Another way to avoid falling for a pyramid scheme is to earn a master’s degree to make you more marketable and potentially become a thought leader in your field.
If you’re interested in business, pursuing an MBA may be perfect for you. A great place to start is to research the many types of MBA specializations and then discover MBA programs that don’t require the GMAT.
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