Pyramid Scheme vs MLM

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Pyramid Scheme vs MLM

Hey there,

You now get familiar with Multi-Level Marketing and when I asked somebody;

“What is Multi-level Marketing?”

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 as Illegal. It is not an illegal business but people were mistakenly taken it as an illegal pyramid scheme.

In this blog, I going to show the difference between MLM and Pyramid Scheme as “ MLM vs Pyramid Scheme”.

As a beginning, I want to ask you something:

Is Multi-level Marketing Fraud or Illegal?

Absolutely not!

Yeah, it’s real, Multi-level Marketing is a type of legal business activity whereby people making and expanding 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 some source of MLM, that is considered as 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.

The FTC states: “Steer clear of multilevel marketing plans that pay commissions for recruiting new distributors. They’re actually illegal pyramid schemes. Why is pyramiding dangerous? Because plans that pay commissions for recruiting new distributors inevitably collapse when no new distributors can be recruited. And when a plan collapses, most people—except perhaps those at the very top of the pyramid—end up empty-handed.”

In fact, most of the contributions are coming from multi-level marketing.

The Legality of MLM in UAE

United Arab Emirates treats a direct selling company as a legitimate business model only when the company possess a licence 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 the 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 guess you can have more doubt “Is Network Marketing a Pyramid Scheme?”

No! They are like the two sides of a coin. 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 organiser creates a pyramid structure that starts with one person who represents the pyramid’s tip.

How Does 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 consider.

Why Are Pyramid Scheme 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 scheme. 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 engage in the Pyramid scheme 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

BasisMLM/ Network MarketingPyramid Scheme
What is it? (as per definition)It is a marketing strategyIt is a fraudulent scheme
IntensionSelling ProductTo build network
CommissionCommission on the basis of each sale.Commission on the basis of appointment of new downline members.
Sale of ProductsSelling of tangible productsNo real product is sold.

Direct Selling Companies 2021

1. Amway

Amway- Pyramid vs MLM

Amway is the no.1 direct selling company in the world, based in Ada, Michigan, the US that has a massive revenue of $8.40. After completing their 60+ successful years of working, today they have a global presence in more than 100 countries. Above everything, In fact, Amway is a family company. Amway Direct Sellers and their priorities are supported to grow as a global company under the leadership of Steve Van Andel and Doug DeVos.

2. Herbalife

Herbalife-  Pyramid Scheme vs MLM

In 1980 Herbalife was launched with the vision of providing better nutrition to the people and improving their lives. Herbalife began their operation in Los Angeles. Today it operates in more than 90 countries around the world.

3. Avon

Avon- Pyramid Scheme vs MLM

Avon is a company that deals with cosmetics and beauty products for more than 135 years with the vision of celebrating women’s power to make a positive and beautiful impact in the world.

4. Vorwerk

Vorwerk- Pyramid Scheme vs MLM

Vorwerk is the oldest and largest family business in the world. It was established in 1883 and deals with household products and cosmetics products.

5. Infinitus

Infinitus- Pyramid Scheme vs MLM

Infinitus is a network marketing company, established in 1992, that is known as the best company providing herbal and health care products. Currently, the business of Infinitus is spread all over the world that in more than 100 countries.

Do you know the Pyramid Schemes for which India fell?

The four biggest Pyramid Scams that happened in India are;

  1. The SpeakAisa Scam
  2. The Saradha Group Chit Funds Scam
  3.  Amway Scam
  4. 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 maliciously involving 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 the pyramid scheme.

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 scheme 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.

Now it’s your turn. Think seriously before entering into this field.

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