New multi-level marketing (MLM) companies pop up all the time. Nearly everyone has a friend who is always trying to get them involved in the latest supplement, candle, or makeup line, with promises that if your interest goes beyond merely purchasing and you begin distributing, too, potential riches await. Cars, bonuses, and free products are just a few common rewards the MLM companies promise to their expanding network of employees.
Those who invest their time and money in MLM companies often feel as though they got swindled or duped. Perhaps the product is not as good as they had hoped, or it is much harder to get friends and family interested in another miracle protein shake. Yet, unlike pyramid schemes, which bear many similarities to MLM schemes, MLM is legal. Why? And, if you are being charged with federal financial fraud for being involved in a pyramid scheme, is believing it to be an MLM campaign a defense?
What is a Pyramid Scheme?
A pyramid scheme begins when one person or a group of people begins to recruit others into an exclusive business, which the new members join by paying a fee. The new recruits continue inviting other people, and as they do so, they receive a portion of their recruits’ fee. The new recruits go on to recruit others, and so on and so forth. Pyramid schemes may have real products or a true business at their base; however, if most of the people involved in the scheme make money by recruiting new people rather than by selling products or services, the “business” is a pyramid scheme.
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