Beware pyramid schemes posing as direct sales opportunities

If you’ve been on social media recently, chances are you’ve seen someone in your network launching a business in direct sales. You may have even been approached by someone inviting you to attend a get-together to learn about a “can’t miss” multi-level marketing (MLM) opportunity.

Most of us are familiar with direct selling companies like Mary Kay, Amway, Rodan + Fields, Scentsy, and others that operate as MLMs. Unfortunately, there are also many con artists out there who seek to convince would-be entrepreneurs to invest in business opportunities that are, in fact, thinly-veiled pyramid schemes.

The state of Washington recently sued one operation, LulaRoe, which was bringing in millions from aspiring small business owners. With this in mind, it is important for consumers to be aware of the red flags they can use to spot potentially illegal pyramid schemes

Highpressure tactics. Take your time. Do not let anyone push you into signing up before you are ready. Pyramid schemes often depend on high-pressure recruitment tactics to ensnare their victims. Talk with loved ones, friends, and even a lawyer or accountant to make sure that the opportunity is right for you.

Income based on recruitment. If much (or all) of your potential earnings are based on the recruitment of others into the business, odds are that you have stumbled upon a pyramid scheme. In a legitimate business opportunity, income is based on the sale of actual products to customers outside of the business opportunity. If the compensation package looks like it rewards recruitment, walk away.

The recruiter makes unsubstantiated income claims. Pyramid schemes will often promise that recruits will become millionaires, drive nice cars, or be able to “fire your boss.” While it is possible to make a direct selling business your primary source of income, individuals that are able to pull this off are a small percentage of the overall direct selling distributor base.

They make questionable health claims. Pyramid schemes often depend on making lackluster products appear marketable so that they can recruit victims to join the “business.” Because of this, consumers should be on the lookout for outlandish health claims, or other unsubstantiated promises about products that appear too good to be true.

You’re pressured to buy products that you don’t want or need just to remain in good standing. If a company mandates a large upfront “investment” and requires you to purchase a certain amount of product regularly regardless of consumer demand, this is a sign that there may not be a real demand for their product. Pyramid schemes often depend on their distributors to purchase surplus product inventory to stay in business.

When approached with a business opportunity, consumers should always be skeptical. One consumer from Illinois wrote to to let us know that he was able to apply the above steps to avoid falling victim to a scam. He writes that he was told he “would practically be guaranteed a set income,” and that “they were more intensely focused on me recruiting people than on what I would sell.”

Fortunately, the consumer from Illinois was able to stear clear of a pyramid scheme, but many scams are hidden so well that victims cannot spot them until it is too late. If you have come across a pyramid scheme or fallen victim to one, it is vital that you report it so that law enforcement can start building a case against the scammer.  You can file a complaint at via our secure online complaint form. We’ll share your complaint with our network of more than 90 law enforcement and consumer protection agency partners who can help put pyramid scheme operators behind bars.

NCL depends on complaints from consumers to help us spot scams and, ultimately, help law enforcement agencies investigate and prosecute scammers. If you’ve been a victim of a scam or been approached by a scammer, file a complaint via our secure complaint form. 

Read our other Fraud Alerts here.