You now get familiar with Multi-Level Marketing and when I asked somebody;
“What is Multi-level Marketing?”
Do you know what does MLM means?
He can say that some direct sales companies use multilevel marketing (MLM) to allow established distributors to hire new distributors in exchange for a portion of their recruits’ sales. The hires are the “downline” of the dealer. Distributors also profit from direct product sales to consumers.
Simply it is the network of distributors for selling products of a company directly to a customer by expanding their network connection by appointing downline members.
But somebody is there who approaches MLM business as Illegal. It is not an illegal business but people were mistakenly taken it as an illegal pyramid scheme. That is exactly what happened in the case of Vector Marketing. Do you think that Vector is a Pyramid Scheme?
Also Read: Is Vector a Pyramid Scheme?
In this “ MLM vs Pyramid Scheme” blog, I’m going to show the difference between MLM and pyramid schemes.
1. Is Multi-level Marketing Fraud or Illegal?
2. The Legality of MLM in The USA
3. The Legality of MLM in UAE
4. Legality in India
5. What is Pyramid Scheme?
6. How Does A Pyramid Scheme Work?
7. Why Are Pyramid Schemes Illegal?
8. Direct Selling Companies 2021
9. List of Pyramid Scams in India
As a beginning, I want to ask you something:
Is Multi-level Marketing Fraud or Illegal?
The truth is Multi-level Marketing(MLM) is a type of legal business activity whereby people make and expand connections for the purpose of direct sale of the product. It is also called Direct Selling because of its nature of business.
Moreover, Multi-level Marketing work on the basis of some laws and rules. It has a genuine code of conduct to follow.
It is legal except for some sources of MLM, which is considered illegal because of cultural and security factors.
Now look at the legality of MLM in different countries;
The Legality of MLM in The USA
In the US, MLM works as “Affiliated Marketing” in 50 states. It is also called “Home Based Business Franchising”. Even if MLM is legal, some of the activities are considered to be illegal.
In fact, most of the contributions are coming from multi-level marketing.
Is Network Marketing or MLM Legal in UAE?
United Arab Emirates treats a direct selling company as a legitimate business model only when the company possesses a license given by the Direct Selling Association of the UAE.
But some of the companies involved in direct selling is warned by the authority for taking an illegal way of activities.
Direct Selling Association considers Direct Sale or Network Marketing as a testament to their vision to establish UAE as the regional hub for the MLM industry.
Legality in India
As per the article written in Lexology that is a website detailing almost all law matters, it is legal in India. However, it is exempted some of the malicious business categories that are aiming to trap innocent customers.
Money Circulation Scheme, Pyramid Scheme, Chit Fund, Ponzi Scheme are the business categories that are to be considered malicious businesses.
I know it is not cleared well for you. I know you have the question “which type of MLM is illegal?”
Studies and articles on the internet show Pyramid Scheme is the main illegal way of MLM. You can see this fact even on a Government website.
I know you have more doubt about “Network Marketing vs Pyramid Scheme, which is illegal?”
The idea is almost similar but one is legal and the other is illegal.
Anyone who deals with MLM for the first time thinks that it is illegal. Because they think MLM is the Pyramid Scheme.
MLM and Pyramid Scheme are different types of activities.
Hope you understand the idea. Now let’s look at some deeper sections about Pyramid Schemes
What is Pyramid Scheme?
In Indian law, a pyramid scheme is a scheme in which an organizer creates a pyramid structure that starts with one person who represents the pyramid’s tip.
How Does A Pyramid Scheme Work?
In Pyramid Scheme, an investor who wishes to enter into the scheme needs to pay a certain sum of money. Then he tries to recruit more downlines for getting high compensation. At all levels of the pyramid scheme, it repeated.
We can see that in Pyramid Scheme, their main focus is building networks rather than selling products.
It is a contradictory activity as MLM considers. Moreover, history shows that people who engaged with pyramid schemes lose their money.
Why Are Pyramid Schemes Illegal?
Rather than providing investments or selling goods, a pyramid scheme attracts participants by promising payments or services in exchange for enrolling others in the scams. When the number of recruits grows, it becomes more difficult to attract, and most members are unable to profit; as a result, pyramid schemes are unsustainable and sometimes illegal.
The intention of the Pyramid Scheme is to attract people to join their network for gaining more income. Selling product is not their concern. Therefore distributors engaging in the Pyramid scam is trying to attract people in a fraudulent way.
They try to join people by giving offers as they can earn profit quickly.
Difference Between MLM And Pyramid Scheme
|Basis||MLM/ Network Marketing||Pyramid Scheme|
|What is it? (as per definition)||It is a marketing strategy||It is a fraudulent scheme|
|Intension||Selling Product||To build network|
|Commission||Commission on the basis of each sale.||Commission on the basis of appointment of new downline members.|
|Sale of Products||Selling of tangible products||No real product is sold.|
How to Spot a Pyramid Scheme?
You can spot a Pyramid Scam in the following ways;
- An MLM company has no products or services. Moreover, the criteria for getting a commission is to recruit people.
- Low quality of products with higher price rates
- The company asked to put money into some initial investments.
- The company promises a quick and imaginary return.
- Pressure to buy a lot of products unnecessarily.
When a Multilevel Direct Selling Becomes a Pyramid Scheme?
Do you know when multilevel direct selling becomes a pyramid scheme?
The companies involved in the below activities can be considered as Pyramid Scheme companies;
- If the company is not dealing with existing products or services, it may be a Pyramid.
- A company focuses more on recruitment, there is a possibility of becoming a Pyramid business. Simply, recruiting new members will be the prime focus of an illegal business.
- When a company asked you to provide some huge initial investments, the chance is higher.
- If the company offers super-quick and high returns, you are going under a serious problem.
Remember that the pyramids are not always like pyramids. In the initial inquiries, you will only understand that it is a legal one. But as the days pass, you will recognize the bitter reality of pyramid scams.
And there is no easy way to earn money. It comes to you on the basis of how you work in that environment.
Do you know the Pyramid Schemes for which India fell?
The four biggest Pyramid Scams that happened in India are;
- The SpeakAisa Scam
- The Saradha Group Chit Funds Scam
- Amway Scam
- City Limouzines Scam
Now let’s look at deeply
List of Pyramid Scams in India
The following are the biggest Pyramid Scams in India;
a. The SpeakAsia Scam
SpeakAsia Online Limited, a Singapore based company asked the investors to company forward an offer that the investors can earn Rs.52000 per annum and they want to pay Rs.11000 as their registration fee. Finally, the company loot 2267 crore from 24 lakh investors.
b. The Saradha Group Chit Funds Scam
It offered many false pieces of information to attract people in West Bengal. They even evade SEBI’s sights.
It rapidly grew a large network by returning nearly 40% of the money invested by the first group of investors. At last, it crashed in April 2013 and more than 1.7 million depositors lost an estimated Rs 200-300 billion.
c. Amway Scam
Network Marketing King Amway also fell into the scam in India. The CEO of Amway India was arrested for being maliciously involved in a pyramid scam. They forced the distributors to grow their channel by recruiting people by offering returns as much as recruited. Then the products became overpriced.
d. City Limouzines Scam
The scam’s mastermind, Mohamed Masood, promised investors across India that their money will buy them a stake in Toyota Innovas.
He’d rent them out and make a lot of money. The vehicles were never purchased, and the case is now in front of a judge. Furthermore, he promised dividends in exchange for bringing in new investors, which he used to fund the checks he issued to his original investors. He defrauded over 200,000 investors out of Rs1,000 crore.
If you really passionate to do multi-level marketing in a legal way, you have to stay away from these kinds of scams.
However, you may have another doubt: “ How to spot a Pyramid Scam?”
It’s simple but reasonable attention is required. The following are the checklist that should consider while entering into Network Marketing.
Check for the products: You should check for the product that you have to sell. Where an MLM activity happens, there will always be a real product. Otherwise, you have to stay away from that business. Because it may be a fraud.
Promises Quick and High Return: Suppose the distributor says that you can earn a high profit within a shorter period. Here you have to think seriously. It can be a Pyramid Scam.
Strange Compensation Process: A pyramid can identify when the compensation plan is strange for you. Also, it involves a complex structure of the commission plan.
Recruiting is Everything: If the activity only involves recruiting new people, you have to think about it. MLM is not only recruiting people but also selling products.
MLM, Multilevel marketing is legal and pyramid types are illegal. MLM has more potential to earn money and you have the support of the network marketing company. Pyramid type of business is illegal, it has no potential to earn good money and you have no support from the ecosystem.
Now it’s your turn. Think seriously before entering into this field. This is your decision, whether to go with the business opportunity or not. Success only comes from serious pain.
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