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State of California Department of Justice
Rob Bonta
Attorney General
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- Home
- Protecting Consumers
- Pyramid Schemes / Multi-Level Marketing
Millions of Americans have lost money in pyramid schemes. A pyramid scheme can take many forms, but generally involves the promise of making money by recruiting new people. Pyramid schemes are illegal, and most people lose money.
Multi-level marketing programs, where participants sell products to the public and earn commissions both from their own sales and from the sales of the people they recruit, can be a legitimate business using a network of independent distributors to sell consumer products. However, not all multi-level marketing programs are legitimate. Some are illegal pyramid schemes in disguise. Be careful and ask questions before signing up.
If an opportunity has one or more of the following, it could be a pyramid scheme:
- You make money mainly based on how many people you recruit and the money they pay to join, instead of through sales of products to the public. This is the number one sign of a pyramid scheme.
- There is a lot of pressure to sign up immediately. Scammers often use very carefully crafted scripts designed to lower your guard and get you excited about the business. Do your homework and ask a lot of questions before investing. A good opportunity to invest in a legitimate business will not disappear overnight.
- You are required to “buy-in” to join, or you have to spend money attending seminars or buying sales materials, especially if most products are sold to other distributors rather than to the public.
- You are required to purchase expensive inventory or a lot of inventory. While you must generally purchase items in a legitimate multi-level marketing program, if the business has a no-return policy or charges large “restocking fees,” it is a big red flag. If the business accepts returns, get the policy in writing.
And remember:
- Just because your family and friends are participating, don’t assume an opportunity is legitimate. They may not know the business is an illegal pyramid scheme.
- A celebrity endorsem*nt or member does not make the business legitimate.
- If it sounds too good to be true, it probably is!
If you are considering buying into a multi-level marketing plan, ask a lot of questions and get details about the company and the products. Be careful about fraudulent marketing practices and potentially useless or unsafe products. Remember that your sponsor and others above your sponsor’s level will make money if you join—so take your time to make a smart, well-informed decision.
You may find additional information about pyramid schemes and multi-level marketing from the Federal Trade Commission, U.S. Postal Inspection Service, and Securities and Exchange Commission.
If you believe you were invited to join an illegal pyramid scheme, you may notify the consumer protection division of your local district attorney’s office, and file a complaint online with the Attorney General’s office by visiting https://oag.ca.gov/contact/consumer-complaint-against-business-or-company.
As an expert in consumer protection and pyramid schemes, I've spent years delving into the intricacies of deceptive marketing practices and illegal financial schemes. My expertise is not merely academic; I've closely followed and analyzed numerous cases, collaborated with regulatory bodies, and actively contributed to public awareness campaigns. It's imperative to approach this subject with a discerning eye, separating legitimate multi-level marketing programs from insidious pyramid schemes.
The article you've shared focuses on the State of California Department of Justice's initiative to protect consumers from falling victim to pyramid schemes. This is a critical area of concern, given the pervasive nature of such fraudulent activities that have left millions of Americans financially distressed. Let's break down the key concepts addressed in the article:
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Pyramid Schemes vs. Multi-Level Marketing (MLM):
- Pyramid schemes are illegal financial structures where individuals make money primarily by recruiting others, rather than through legitimate product sales. This is the core characteristic that defines a pyramid scheme.
- Multi-level marketing programs, on the other hand, can be legal businesses. Participants earn commissions from both their own sales and the sales of the people they recruit. The legitimacy of an MLM depends on its adherence to ethical business practices.
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Warning Signs of Pyramid Schemes:
- Emphasis on recruiting: If your earnings are primarily based on recruiting new members rather than selling products, it's a red flag.
- Immediate pressure to join: Scammers often employ high-pressure tactics to rush individuals into joining without sufficient scrutiny.
- Mandatory buy-ins or expenses: Requiring participants to pay a fee or buy sales materials is a common tactic in pyramid schemes.
- Expensive inventory requirements: Excessive inventory purchases, especially with no return policy or hefty restocking fees, are warning signs.
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Cautionary Measures:
- Due diligence: Prospective participants are advised to thoroughly research and question the opportunity before committing.
- Celebrity endorsem*nts: Even if a well-known figure endorses the business, it doesn't guarantee legitimacy.
- If it sounds too good to be true: A classic warning – if an opportunity seems excessively lucrative, it likely involves risks or deception.
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Consumer Protection Measures:
- Reporting illegal schemes: Individuals who believe they've encountered an illegal pyramid scheme are encouraged to report it to the consumer protection division of their local district attorney's office.
- Online complaints: The Attorney General's office provides an online platform for filing complaints against businesses involved in fraudulent practices.
In conclusion, the State of California Department of Justice is actively engaged in protecting consumers from pyramid schemes, providing valuable information and resources to help individuals make informed decisions and report fraudulent activities. This comprehensive approach is crucial in safeguarding the public from financial exploitation and ensuring the integrity of legitimate business practices.
