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The difference between multi-level marketing and Ponzi schemes

It seems like everybody knows somebody these days that's into a multi-level marketing plan.

See if this sounds familiar:

You get invited to a friend's house for "party" where you know someone will give you a sales pitch about their company's awesome jewelry, cookware, food, leggings or vitamin shakes.

If you and the other guests buy enough stuff and agree to host parties of your own, the friend that invited you gets a lot of free goodies (no pressure there, really...).

Suddenly, you get a personal sales pitch, where the salesperson tells you how you could become part of his or her "team." Sounds flattering, right? Plus it's a chance to make some quick cash.

If you sign on, the salesperson who signed you up gets a little off the top of whatever you make. In turn, his or her team leader gets a little cut of your team leader's earnings -- all the way up the ladder to the top.

Does this sound vaguely like a pyramid scheme to you?

If it does, you aren't alone. There's a very thin line between multi-level marketing (MLM) sales structures and a basic Ponzi scheme -- except that one is legal and one isn't.

How do you tell one from the other?

1. Are you selling a tangible product?

One of the biggest differences between Ponzi schemes and MLM sales is that MLM companies do provide real products for sale. Ponzi schemes don't provide actual physical products, just "investments" that are supposed to be paid back (usually with the promise of much greater reward than risk).

If you're handing your customers leggings or shake mixes when they hand you money, it's probably a legal MLM company, not a scam.

2. Are you required to invest a lot of your own money?

If you have to purchase your own inventory to start and lay out a considerable amount of cash for a product that supposedly "sells itself," you may be the victim of a scheme -- and there's usually no way to get your money back. Be wary of any company that doesn't offer to buy back unsold products, asks for payments in cash or requires a large initial investment.

If you're thinking about going into business for yourself, it's always wise to find out more about the laws surrounding start-ups, franchises or MLM campaigns before you start.

Source: FindLaw, "Is Multi-Level Marketing Illegal?," Christopher Coble, Esq., Nov. 15, 2017

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