Pyramid schemes are among the most persistent and troublesome rip-offs facing consumers today. Also known as "multi-level marketing" ventures, they often are advertised as quick ways to get rich. Unfortunately, some of these schemes violate Washington State's Anti-pyramid Promotional Schemes Act and can prove extremely costly to those who invest in them.
What is a multi-level venture?
As their name implies, multi-level businesses operate on several levels. Staff in one tier have others working beneath them, offering some product or service but the emphasis is to recruit others to the venture. Those people, in turn have others working beneath them to sell products, and so on.
There are some well-established, legal multi-level marketing operations. Successful participants in these make money primarily from the products they sell to end users—not to themselves (warehousing) or other recruits. Illegal pyramids and gifting schemes tout making money by you having others sign up underneath you and pay money so you get rich based on their recruiting.
What is an illegal "pyramid scheme"?
An illegal "pyramid scheme" is a form of multi-level marketing where the product or service is only of secondary importance, or there may be no product at all in the case of gifting or blessing scams. To join, you must pay some type of initial investment that gives you the right to recruit others into the company. For each person you bring into the company you receive money, or other bonuses or move closer to your big pay day Therefore, your earning potential depends primarily on how many people you sign up, not how much merchandise is sold.
Washington law declares the following practices illegal under the Anti-pyramid Promotional Schemes Act:
(1) No person may establish, promote, operate, or participate in any pyramid scheme.
(2) A limitation as to the number of persons who may participate, or the presence of additional conditions affecting eligibility for the opportunity to receive compensation under the scheme, does not change the identity of the scheme as a pyramid scheme.
(3) It is not a defense under chapter 65, Laws of 2006 that a person, on giving consideration, obtains goods, services, or intangible property in addition to the right to receive compensation, nor is it a defense to designate the consideration a gift, donation offering, or other word of similar meaning.
What is meant by an "investment"?
An investment includes any money paid to enter the venture. Though it may be called a "membership fee" or a "bookkeeping charge", the law still considers it to be an investment. And an inventory of products you must buy to resell is also considered an investment. Giving your time or talents, or buying demonstration samples at cost, are not considered investments.
Does the Attorney General's Office review multi-level marketing ventures for legality?
No. This office does not endorse or approve any marketing program. Anyone who says that their program is approved of by the Attorney general is engaging in a deceptive act. It is a violation of state law for any pyramid operator to claim or imply the program has the approval of the Attorney General's Office.
Some illegal pyramid operators may tell you that the details of the program were sent to the Attorney General's Office and that the office did not express any objection. That does not mean the program is in compliance with state law, since our office does not provide that kind of advice.
What should I do if contacted by an illegal pyramid operator?
Ignore their marketing pitch and file a complaint with the Attorney General's Office.
Remember: Every person who participates in an illegal pyramid scheme is breaking the law.
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