The Securities and Exchange Commission (SEC) recently issued a warning
to investors cautioning them against pyramid schemes that masquerade as
multi-level marketing (MLM) programs. MLM programs are legitimate marketing
strategies where the salespeople are compensated not only for sales they
actually make, but also for the sales that are made by the other people
they have recruited to join the MLM.
The SEC warned investors against hastily participating in what appears
to be a MLM program because they could potentially be illegal pyramid
schemes. Careful consideration should be given to distinguish the two,
as pyramid schemes can potentially violate securities laws which prohibit
fraud and require registration of securities offerings. In pyramid schemes,
money from new recruits is used to pay the commissions of existing recruits.
The SEC asks investors to consider the following before joining a MLM program:
- Is there a genuine product or service?
- Is the MLM program promising a high return quickly?
- Is the company promising to pay highly for little work?
- Ask to see company’s financial statement to ensure demonstrated revenue sales.
- Are you asked to buy-into the company?
- Does the company have a complex commission structure?
- Is the company emphasizing recruitment?
If you answered yes to any of these considerations, you might be in danger
of joining a pyramid scheme. These questions are there to help you decipher
between legitimate MLM programs and pyramid schemes.
The SEC issued this warning in light of its recent charges against California
resident Steve Chen 13 California based-entities at the center of a $32
million pyramid scheme. According to the SEC report, Chen and his entities
allegedly misled investors into believing that their company was backed
by lucrative amber deposits in Argentina worth billions of dollars. According
to the SEC, Chen falsely presented his company as a multi-level marketing
company and raised $32 million dollars from investors.
Because of these charges, the SEC wants to protect investors from any future
fraud and especially from pyramid schemes disguised as multi-level marketing programs.