“Pyramid scheme” sounds sinister. [that’s because it is.] The term is used so routinely and casually that it is easy to imagine it has long been codified as illegal in the United States. [it is illegal, but the FTC doesn’t enforce it across the industry, preferring to regulate in a manner that appears to ensure job security – slow day at the FTC, so an employee says to themselves, “I think I’ll shut down an MLM because it is as easy as shooting fish in a barrel but I’ll look heroic doing it.”] It turns out, however, that the concept is a rather recent American legal construct that has yet to be codified in federal statutes. [while the term has not been codified, the FTC Section 5 law that prevents “unfair and deceptive” business practices has addressed this issue since at least the 1970s with several MLM shutdowns and permanent restraining orders, and this may soon change with the Neora lawsuit, as Neora has demanded better regulatory guidance, and this would be a welcome change.]

To many people, “pyramid” evokes marvelous images of an ancient and bygone era. [context is everything, a horse can gallop or someone cannot speak, same word.] The Great Pyramid of Giza was one of the Seven Wonders of the Ancient World. [and that doesn’t lead one to think of an MLM scam.] The ancient Aztecs also had pyramids—works of profound engineering and beauty. [again, a meaningless point.]

After maintaining a positive and wondrous connotation for millennia, “pyramid” acquired a decidedly negative financial meaning in early twentieth-century America. [in a completely different context, and many words have had their meanings change/expanded or completely new words invented.] The Oxford English Dictionary credits the American Samuel Reinsch with its first usage.¹ [besides having a negative connotation, there is no practical connection to an MLM scam.]

In his Readings on American Government, published in 1909, Reinsch uses the term “pyramid” to discuss “an illicit, unstable financial scheme.” [that quote never occurred in the book, but the word “pyramid” did once: https://archive.org/details/readingsonameric00reinrich/page/392/mode/2up?q=pyramid, as the above link shows. I don’t believe if what happened then happened now, it would be considered illegal. It isn’t much different than promoting something on YouTube and getting paid for the number of http://theshoalspharmacy.com eyeballs attracted to watch it, so I think it was the novelty that made it to be considered illegal.] Later, in 1920, the Oakland Tribune described Charles Ponzi’s infamous scheme as a “pyramid.” [A Ponzi is fundamentally different than an illegal MLM pyramid and unfortunately the confusion between them has continued to this day. Ponzi scams usually involve the stock market and pay later investors with the contributions made by earlier investors rather than value growth of the stocks supposedly being purchased. Only the single entity at the top is usually aware a Ponzi scheme exists, those who contribute money to buy the stocks are not aware of the scam. An MLM scam has multiple layers, sometimes into the hundreds and even thousands, and the higher in level one becomes, there is increasingly more understanding they are participating in a scam, especially with the information on the internet, so the time involved almost guarantees the higher levels are aware that the MLM is a scam, but the person is either stupid, chooses to ignore the ample evidence, or sees no way out (and there is always a way out, quit), so they continue the scam.]

The OED also credits Americans with originating the term “pyramid scheme,” which first appeared in the Oakland Tribune in 1949. [There is no reference to verify this claim, but given the other errors found I wouldn’t doubt this to also be false, but it is a rather meaningless point to begin with.] It gives three examples of the use of “pyramid scheme,” each of which involves financial transactions. [See above.]

Nevertheless, the term has such evocative and pejorative connotations that it is frequently used as a term of art in federal complaints, including under Section 5 of the Federal Trade Commission Act and under securities law. [It’s not only meant as evocative and pejorative term, but to denote an illegal activity as well.] Recent examples include FTC cases against AdvoCare ³ and Neora (formerly Nerium).⁴ [And both of them claim there are a lack of retail sales, the very definition of an illegal pyramid.] According to the Association of Certified Fraud Examiners, the FTC shuts down approximately ten pyramid schemes annually.⁵ [That’s several hundred too few.] Despite the lack of a standard definition, various federal agencies have web pages warning consumers about the differences between illegal pyramid schemes and legitimate multilevel marketing businesses. [That hardly anybody reads, which makes it an almost total waste of taxpayer dollars.] The table below presents various informal indicia of pyramid schemes, as determined by the Securities and Exchange Commission, the FTC, and the FBI. [All of which don’t have a clue what they’re doing when it comes to defining an illegal pyramid, not to mention MLM RICO fraud tool scams, which is an even larger problem with MLMs having this “feature,” such as Amway: https://stoptheamwaytoolscam.wordpress.com/]

[The FTC also addresses “No demonstrated revenue from retail sales.”

The FBI also addresses “No demonstrated revenue from retail sales” and “Buy-in required”: https://www.fbi.gov/scams-and-safety/common-scams-and-crimes/pyramid-schemes. In fact, the “Emphasis on recruiting” and “No demonstrated revenue from retail sales” are normally interpreted as different sides of the same coin. There is nothing wrong with an emphasis on recruiting, but IF AND ONLY IF there are significant retail sales to non-distributor customers. This is where the two sides, pro and anti-MLMers, often talk past each other. Also, it is old school to suggest money is being made on the mere act of signing someone up. While there are examples of this that can probably be found in 2020 and beyond, it is not normal because this issue was successfully prosecuted years ago and more sophisticated methods are much more commonly used, but one wouldn’t know it by reading the screeds of the anti-MLMers. The fact is most new MLMers buy the products and THIS is what makes the upline money and there is nothing wrong with this, but IF AND ONLY IF there are significant retail sales to non-distributor customers. Have you noticed a pattern? The problem with the “profits from signing people up” is that the MLM critic either isn’t aware most MLMs don’t pay the distributors for signing someone up or are sloppy with their language and silently include the initial and ongoing MLMer product purchases. The MLMs can easily overcome this inferior use of language by easily demonstrating that no money is paid to the distributors by the mere act of signing up someone and they never have to address the lack of retail sales issue, the exact definition of an illegal pyramid. So the anti-MLMers do the pro-MLMers a favor by being lazy and/or incompetent, the perfect scenario to take advantage of others.]

Although these are not formal legal definitions, it is surprising how little overlap there is across federal agencies, whose only point of agreement is that pyramid schemes emphasize recruitment. [As described above, the emphasis on recruiting with the simultaneous lack of retail sales are the only major factors that need to be considered, everything else is just window dressing, including very overlapping and highly subjective issues.] Moreover, these indicators provide little clarity to consumers because “recruitment” is normally associated with jobs and regarded as a legitimate business activity. [MLMs don’t normally use the term “recruit/recruitment,” they use words such as “sponsoring,” inferring a helpful partnership. People who have no or little experience with how MLMs really work don’t realize how many things they do not know.]

Nor are the other indicators unambiguously and uniquely related to pyramid schemes. [That’s why I called them mere window dressing.] “Promises of high returns in a short period of time” are common for many legitimate business opportunities, whether the claims are substantive or mere puffery. [So why make a big deal about it?] So too are promises of “easy money or passive income”; indeed, long-term personal investing is a largely passive endeavor. [Most MLMs don’t use the “easy money” spiel, but they do say it’s easier than the 50/50/50 plan, work 50 hours/week for 50 years and retire on 50 years of your income. Also, the concept of passive is much different in a business than investing while employed, as there is active work to build an MLM business and then reap the rewards with passive income, which is a mirage because it takes full time effort just to keep the downline numbers up owing to a high drop out rate.] “No demonstrated revenue from retail sales” is not a reasonable indication of a pyramid scheme, or else every business in the United States without retail sales might qualify. [This is pure pap, because lack of retails sales is the exact definition of an illegal pyramid. And just because service companies don’t have “retail sales” is a meaningless argument.] Many legitimate businesses, such as franchises, require “buy-ins,” and others, such as real estate, retail clothing, and insurance agencies, have “complex commission structures.” [Again, then why focus on these issues rather than the fundamentals of recruiting AND retail sales? All that is “accomplished” is to confuse people with unnecessary complexity.] Patrons of used car dealerships understand the prevalence of “high-pressure sales tactics” in legitimate businesses all too well. [See above.] And consumers purchasing “more products than they want to use” is perhaps puzzling, but hardly unambiguous evidence of a pyramid scheme. [See above.] Moreover, many pyramid schemes involve purely financial transactions in which there is no purchase of “products” whatsoever. [You are making my argument to focus on the fundamentals, over and over again.]

Ultimately, the federal agencies’ lists of supposed pyramid scheme indicators do not allow us to distinguish a pyramid scheme from a legitimate business activity on the federal level. [That’s because they are similar to the authors of this article, they don’t know what they’re talking about.]

Many states, including California ⁶ and New York,⁷ also have similar lists, bound up, respectively, in endless chain and chain distributorship laws. [Those state laws have been found to be meaningless at the federal level, just do a search for Ger-Ro-Mar.] These lists are equally insufficient. [We just agreed on something, although I’m the only one that knows why.] That said, many states have been aggressively moving to update their pyramid scheme laws in recent years by enacting strong definitions and banning the schemes. [Most of the state laws mimic what has been tried several times at the federal level, by legalizing illegal pyramids.]

No doubt, some fraudulent business plans warrant government scrutiny, but current federal efforts to define some business practices as pyramid schemes do not clearly distinguish between harmful and wholesome businesses. [IF you review the numerous MLM scams taken down by the FTC over the past few decades indicate the real problem is low levels of regulation, not the differences between legitimate MLMs and illegal pyramid scams.]

Ancient pyramids, built to withstand adverse elements, have lasted millennia. [Back to the Egyptian story….] In contrast, pyramid schemes do not withstand the slightest scrutiny. [The problem is most don’t get the slightest scrutiny.] They are little more than a house of cards, quickly falling apart and hurting those who have “invested” in them. [The problem is illegal pyramids do NOT fall apart, the 61 years of Amway as of 2020 proves that point.]

*About the authors:

• Harold Furchtgott-Roth, Director, Center for the Economics of the Internet [Harold has a lot to learn about MLM scams.]
• Kirk R. Arner, Legal Fellow, Center for the Economics of the Internet [So does Kirk.]

Source: This article was published by the Hudson Institute [They should be embarrassed by this display of ignorance.]

¹ Oxford English Dictionary, https://oed.com/view/Entry/155386?redirectedFrom=pyramid+scheme#eid112152329. ↝ 

² Search results for “pyramid scheme,” Govinfo, https://tinyurl.com/sa97ljx. ↝ 

³ Plaintiff’s Complaint for Permanent Injunction and Other Equitable Relief, Federal Trade Commission v. AdvoCare et al., No. 4:19-cv-00715 (E.D. Texas 2019), available at https://www.ftc.gov/system/files/documents/cases/advocare_complaint_0.pdf. ↝ 

⁴ Complaint for Permanent Injunction and Other Equitable Relief, Federal Trade Commission v. Neora et al., No. 3:19-cv-19699 (D.N.J. 2019), available at https://www.ftc.gov/system/files/documents/cases/1623099_nerium_complaint_11-1-19.pdf. ↝ 

⁵ “Ponzi Schemes,” Association of Certified Fraud Examiners, https://www.acfe.com/ponzi-schemes.aspx. ↝ 

⁶ “Pyramid Schemes / Multi-Level Marketing,” State of California Department of Justice, Xavier Becerra, Attorney General, https://oag.ca.gov/ consumers/general/pyramid_schemes. ↝ 

⁷ “Don’t Get Caught in a Pyramid Scheme,” New York State Office of the Attorney General, Letitia James, NY Attorney General, https://ag.ny. gov/consumer-frauds/pyramid-schemes. ↝