Subject: FAQ: How to Spot A Pyramid Scheme Keywords: pyramid ponzi scam scheme Is this one of those pyramid schemes? Edition: 11 Jun 94 Audience: World-Wide This is a question that may occur to you, although you may not have a clear idea what you mean by the phrase. Read This...if you are involved in a networking marketing plan, because you will eventually be asked this question. Read This...if you aren't in network marketing, because sooner or later you will be approached by someone representing either a genuine pyramid/Ponzi scheme, or an abusive or needlessly limiting Multi-Level Marketing (MLM) plan. Questionable MLMs are often what people have in mind when they suspect something of being a "pyramid scheme". Therefore, this article discusses some notorious MLM abuses. A Pyramid Primer The term "pyramid" is generally understood to refer to various financial schemes that are specifically illegal under the laws of most states, as well as under the U.S. Postal Code. The classical pyramid is the cash chain letter, as exemplified by the "Dave Rhodes Plan", which morphed into the "MAKE MONEY FAST" plan often seen on the Internet. There are several broad characteristics of pyramid schemes. Not all apply to any particular scam: * Program financed mainly or entirely by enrollment fees. * Scheme collapses if growth ceases. * No actual product, or a "decoy" product. * Product(s), if any, grossly overpriced. * Program of negative value until new rep achieves a lofty bonus level. * Bonuses paid on enrollment fees and/or sales aids. * Presented as a "get rich quick" opportunity. * Claims of specific high income. * You can't earn more than your sponsor. * Founders are often invisible. A House of Cards (and Fees)? The hallmark of a pyramid is a stiff initial investment that is mostly or entirely "fee", that is, it delivers material of little value, or no value at all. Often, a pyramid relies heavily or exclusively on the enrollment income, and has no on-going income from other sources. Abusive MLMs may also have high initial investments, perhaps disguised as "business starter kits". Beware of MLMs with high mandatory start-up expenses, particularly if they pay bonuses on the fee and/or sales aid portions. Be particularly careful if they have no same-customer repeat sales. The enrollment charge for reputable plans is typically less than $30.00, on which NO bonus is paid to the up-line. In addition to paying for creating your account, the fee will also normally deliver a copy of the formal business plan, product descriptions/brochures, covers the first year's newsletter subscription and possibly supply some business aids and product samples. Sign-Up Tonight or Forfeit? The presence of a "hard sell" is always a warning sign. Sometimes you may also be told that you must decide to enroll before leaving the presentation, or else forfeit your opportunity to enroll. This actually makes your decision quite easy: make sure your pockets haven't been picked, and run for the door immediately. Reputable programs teach their people to avoid high pressure techniques, on the principle that anyone who has to be coerced into registering will probably not take the initiative to regularly order products for their own use, much less present the plan to anyone else. Grow or Die? Because a pyramid scheme relies on enrollment fees or a worthless product, its lifeblood is new enrollments. If they stop, the scheme dies, because the recent enrollees have no way to recover their investment, and no other reason to remain in the program. Abusive MLMs also rely on enrollments, but may disguise them behind the sale of an expensive one-time product. Beware of MLMs that sell a product you are likely to need only once per lifetime (if you really need it at all). The income for a healthy plan is almost exclusively based on the repeat sale of consumable products. Even if new enrollments were ever to cease for some unlikely reason, the income and bonus payments would simply stabilize near current levels, then increase as new products were added. Beware if a plan appears to be generating most of its income from enrollments, particularly "front-loading" (getting new reps to invest in huge inventories they can't consume themselves, and are unlikely to re-sell). Vaporware or Misrepresented Product(s)? True pyramids have no product at all (pure fee). Some attempt to disguise it by claiming that the "business is the product". The test applied by most Attorneys General is: In the absence of the business plan, is there any "product"? Abusive MLMs are a little more clever than true pyramids, and market expensive sales aids or decoy products that are either grossly overpriced, or are something that people don't really need. The A.G. test in this case is: Would people be likely to buy the product or aid at that price were it not for the bonuses? A test you can apply is: Are any sales being made to unenrolled retail customers? If the answer is "no", watch out. Up or Out? If the program doesn't work for everyone, at all levels in the plan, it is probably a true pyramid scheme. In classical pyramid-style Ponzis, you don't earn anything until you reach the top position, or your earnings are strictly limited to a specific amount at each position, and you can never earn more than your sponsor. In reputable plans, there are no limits to what you can earn at any position, and the status of your sponsor is irrelevant. Break-Even Time In abusive or needlessly limiting MLMs, it takes a long time, working hard, to recover your initial investment. In addition to front-loading, beware of MLMs that refuse to sell products in less than case lots, where you personally would take a year or more to consume an entire case. Money for Nothin'? Bonuses are what makes network marketing tick, just as commissions are what makes much of retail selling tick. However, your A.G. will look suspiciously on schemes that pay commissions on empty dollars that don't represent actual products. Bonuses on enrollment fees are often illegal. Reputable network marketing plans sell business aids at or near their cost, and don't pay bonuses up-line on sales of business aids. How Many Can Play? Beware of enrollment limitations. The classical chain letter has you send a copy to exactly five people, no more, no less. Many pyramid scams specify a rigid matrix of enrollees. Upper limits on enrollments are needless and suspicious. Stealth Management? In the classical chain letter, once launched, it takes on a life of its own, and the instigators vanish. In other pyramid schemes, the principals are underground, off-shore or barricaded in remote glass towers, appearing never, only on video, or in tightly orchestrated situations. Withholding? Abusive MLMs often identify themselves by failing to identify themselves. If the name of the plan and the "servicing" company are not volunteered up front, consider that a red light. If they won't tell you, you are being not so subtly informed that you won't be able to tell your candidates either. You'll also need consider what else is being withheld, disguised or falsified. If the real company/plan logo isn't prominently featured on all the materials you're being shown, ask why. Exponential Asymtotes? Mathematically literate people sometimes object to network marketing because if one person enrolls five, and they each enroll five, after 11 generations every family in the U.S. will be enrolled, and that last generation will have no business opportunity. The facts are that: * Real networking organizations don't consist of a rigid pyramid-shaped matrix. They more resemble spider plants. A plan I used to be active in (since defunct) was paying some reps over 20 levels deep in their down-line. * No networking plan has ever reached or even come close to mathematical enrollment saturation. It is impossible, because growth would begin to slow long before that, and enrollments would have become progressively, then exponentially more difficult as more and more of the population was enrolled. Only one plan (not the one I was in) has ever even reached "mind-share saturation", where growth has slowed (but still not stopped) due to most of the populace already having a pre-formed opinion about them (negative in their case, due to abusive recruiting tactics and a needlessly difficult business plan). A domestic network plan needs to enroll about 1% of the U.S. population before growth is at risk of even beginning to slow. In Conclusion... It is no secret that diagrams of network marketing organizations take the shape of a pyramid (although some go to great lengths to disguise it). The fact is that the financial power of these programs relies on the geometric leverage of the organization you create. Also keep in mind that the organization chart for any business/agency you have ever worked for probably also takes that shape. The shape isn't the problem. Regards, PO Box 248 Bob Niland Enterprise mailto:name@isp-name.domain Kansas which, due to spam, is: 67441-0248 USA rjn AT access DASH one DOT com Unless otherwise specifically stated expressing personal opinions and NOT speaking for any employer, client or Internet Service Provider. ______ Postscript on Ponzis A Ponzi is a fraudulent and illegal "investment" scheme in which early investors are paid solely from the funds invested by later victims. There is no other significant revenue-producing activity. Ponzis always eventually collapse, leaving the later investors unpaid. The scheme is named for Carlo "Charles" Ponzi, a con man who bilked a number of prominent people in Boston, MA during 1919 and 1920. He was subsequently deported to Italy, where he even managed to survive swindling Mussolini.