Attorney DeBruin represents clients from across lower Michigan.

Attorney DeBruin represents clients from across lower michigan.

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The fine line between MLMs and pyramid schemes

On Behalf of | Oct 10, 2023 | Criminal Defense, Fraud

Becoming your own boss, working anytime and potentially earning more than your current job are common selling points often touted by Multi-Level Marketing (MLM) businesses and pyramid schemes. However, before investing your time and money in a seemingly good business, it is essential to know the difference between the two. They may appear similar on the surface but one of them is illegal in Michigan.

One is legitimate, the other is illegal

An MLM works by relying on a network of distributors to sell and move its products or services. Distributors earn commissions from their own sales, but also from those made by their recruits. Ideally, everyone participating in an MLM should earn a profit, however small.

In contrast to an MLM, a pyramid scheme emphasizes recruitment rather than the sale of legitimate product or service to earn a profit. Unfortunately, pyramid scheme participants often resort to using fraud to bring in new people.

High returns, the promise of easy money and mandatory buy-ins are just some of the red flags in a business opportunity that the U.S. Securities and Exchange Commission (SEC) uses to identify a pyramid scheme.

Pyramid scams today may be harder to spot because they masquerade as legitimate MLMs. There are many MLMs that offer products but prioritize recruitment or incentivize purchasing inventory. Many who join these companies end up with a surplus of unsellable products.

Use your best judgment

Joining and recruiting for a promising new business that is actually a pyramid scheme can not only cost you time and money, but land you in legal trouble. In Michigan, you can face fines and jail time for knowingly promoting or taking part in a pyramid scheme.

In general, MLMs focus on moving product while pyramid schemes emphasize recruitment. However, even if a business opportunity is legal, it may not necessarily be a good one. When considering new ventures, it’s essential to take your time and do your due diligence.