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. People 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 (sometimes referred to as “inventory loading” or “warehousing”) or other participants.
What is an illegal "pyramid scheme"?
By contrast, illegal pyramids emphasize recruitment and offer the opportunity to earn income primarily from recruiting new participants. Such schemes may involve a genuine product or service, but the company encourages recruitment as a driver of income.
To join, you must pay some type of initial investment (sometimes called “consideration”) that gives you the opportunity to recruit others into the company. For each person you bring into the company you receive income—either in the form of a one-time bonus or subsequent commissions based on the new recruit’s activities—and further recruitment may unlock more and larger rewards as you advance in the company. Therefore, your earning potential depends primarily on how many people you sign up, not how much merchandise is sold.
Pyramid schemes are prohibited by Washington's Anti-pyramid Promotional Schemes Act.
What is meant by an "investment" or “consideration”?
An investment or consideration includes any money paid in exchange for the opportunity to participate in the business. Though it may be called a "membership fee" or a "bookkeeping charge", the law still considers it to be an investment. An inventory of products you must buy to resell is also considered an investment, unless the company promises to repurchase the inventory from you if you decide to quit. But giving your time or talents, or buying demonstration samples at cost, might not be 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 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 object. That does not mean the program is in compliance with state law, because 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.
Before signing up for a multi-level marketing or other direct selling business opportunity, consider the following:
- Closely evaluate claims about income potential. In particular, be wary of tales of quick success or other stories that sound too good to be true.
- Ask for realistic estimates of the time commitments involved. For example, if the company suggests you can earn a certain income, ask for a description of the tasks required to earn that income and time estimates for those tasks.
- Ask questions about the required investments and sources of income. For example:
- How are the products sold? Who are the customers?
- What upfront investment in product is required? Are there monthly/quarterly/annual requirements after that?
- Can you return products for a refund? If so, are there restrictions on the product eligible for a refund? Will you be expected to pay shipping costs for returned inventory?
- Are you required to pay any fees for participation, training, sales materials?
- Are you expected to pay for other business costs such as taxes, legal fees, equipment, or travel expenses?
- Is the income made by selling the product directly? Is a part of it made by recruiting other participants or based on the sales of those recruits? If so, what portion is made from recruitment?
- Conduct your own independent research. Look online for information about others’ experiences with the company, both positive and negative.
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