Have you ever joined a direct-sales company after meeting someone who seemed to have it all together; to be going places?
Have you ever gotten into sales at one of these companies and realized it wasn’t all that it was advertised?
If so, you are one of the millions of Americans who have, and there are millions more trying to fulfill the promises their recruiters gave them.
The fact that some will achieve these goals makes these businesses attractive to the vast majority of employees who probably won’t end up making even minimum wage.
You may be able to name a few of these companies right away. They are called multi-level marketing (MLM) companies, and they are prevalent right now.
So what sets these companies apart from pyramid schemes?
Pyramid schemes are illegal and multi-level marketing is not. However, what makes them illegal? What makes multi-level marketing legal?
A pyramid scheme is a fraud. The white-collar crime is identified by the FBI under securities and commodities fraud schemes. Investors are promised they will make large amounts of money and are required to invest an initial sum to get into the company.
Then, to make back their investment plus a profit, they must recruit others to invest, who will recruit even more, and so on.
Only those at the top end up making a profit, and the whole thing usually folds pretty quickly because of the rapid growth needed to keep the scheme afloat.
The entire thing is run on recruitment rather than selling products.
You may also recognize a pyramid scheme by such terms as “cash gifting,” “chain letters,” or “cash leveraging.”
What sets multilevel marketing companies apart is that they have distinct products for their recruits to sell. Many of these companies, however, make it part of their business model to encourage recruits to make other recruits to make more money.
Many of these companies, such as Herbalife, have come under scrutiny or investigation because employees claim there is no way to make money selling the product.
However, even after an investigation, Herbalife was deemed not to be a pyramid scheme. They did need to change some of their business practices.
In addition, several multilevel marketing companies have been investigated for charges of pyramid schemes. Herbalife was one of the most recent. Several others over the years have folded under the strain of investigation or legal battles.
Penalties for Pyramid Schemes
In Michigan, pyramid schemes can be penalized under one of several laws:
- Pyramid Promotion Act
- Franchise Investment Law
- Consumer Protection Act MCL 445.1528.
Under the Franchise Investment Law, pyramid schemes are considered a felony punishable by $10,000 in fines and up to 7 years in prison. Even participating in a pyramid scheme is regarded as a misdemeanor.
Other potential penalties could include prison or jail time, fines and restitution payments, and community service. Also, you could have your business license revoked and your business assets frozen.
Keep Safe From Pyramid Schemes
Michigan enacted the Pyramid Promotion Act to update its laws about pyramid schemes.
Since it can be challenging to spot an actual pyramid scheme amid the many legitimate multilevel marketing companies, here are some warning signs:
The number one warning sign is when you are encouraged to recruit more people over selling the product. This includes a focus on the growth of your “downline” or those selling under you.
You may be tipped off by being asked to buy an expensive package of inventory to join the company or if moving up to another level of the company requires you to pay more money.
Another revealing practice is when the company routinely brags about a few of its top earners.
While you could potentially face charges for knowingly engaging in a pyramid scheme, the harshest penalties go to those who start a pyramid scheme for their own gain.
One strong defense is that most people won’t know if they are part of a pyramid scheme. Most people recruited down the line are victims themselves.
Contact Detroit Criminal Defense Attorney David J. Kramer
If you are being investigated related to pyramid schemes, you need to have an experienced criminal defense attorney by your side. David J. Kramer has been successfully defending clients accused of white-collar crimes since 1992.