How To Avoid a Pyramid Scam

by Leslie Truex

Home Business / Other Business Opportunities

Published on this site: December 20th, 2011 - See more articles from this month

A challenge to finding a work-at-home opportunity is avoiding scams. One of the most feared swindles is the pyramid scheme. Unfortunately, most people do not know what a pyramid scheme is. As a result, they pass up viable direct sales opportunities they erroneously believe are pyramids, but sometimes are caught up in Internet or "investment" schemes that are illegal pyramids.

So what is a pyramid? First, a pyramid scheme is not defined by its shape. If the shape determined legality of an organization, the government and most businesses would be illegal since the hierarchy is a pyramid. Second, the act of recruiting others doesn't automatically mean a business is a pyramid scheme. Instead, a pyramid is a scam that promises monetary benefit, without a product or service. Bernie Madoff ran a pyramid scheme in which people thought they were putting their money into legitimate investments. However, Bernie did not invest the money. Instead, he "paid" initial investors with money from newer investors. I had a friend who was invited to "gifting club" whereby he could invest $5000 and the club then would help him find five other people to "gift" $5000. Essentially the scam promised to net $20,000 from a $5,000 investment.
They are illegal because they promise financial gain, but there is no product,
service or legitimate investment instrument.

In an illegal network marketing scam, participants are paid to recruit new members instead of on product sales. This is where things can get confusing. While you can earn income by introducing new business builders into a network marketing company, your income should NOT be based on recruitment. Instead, legitimate income in network marketing is based on you and your team's sales. Some Internet programs try to get by this rule by having a "membership" program with junk ebooks or services to qualify as products. You can spot these because the focus is on recruiting not on providing a product or service. Be suspicious of any business that focuses on payment per recruit instead of income based on sales.

To avoid pyramids, investigate companies. Find out what products or services it sells, its origins and quality. For example, if it's a bunch of eBooks you can get for free or through private label rights elsewhere, then it's probably a business trying to look legit, but is focused on pyramid income. Study the compensation plan, which should be based on a flat-rate or percentage of sales.


Ultimately, if the only way to make money is by getting others to join, then it's probably a pyramid scheme. But, if your income is based on the sale of a product or service, or a legitimate investment tool (i.e. stocks), then it's probably safe.