Pyramid schemes are a type of scam that has been around for many years, but keeps popping up and scamming unsuspecting victims taken in both by their lack of skepticism and an abundance of greed, which is a profitable combination for scam artists.  Recently, Bob Ferguson, the Attorney General for the State of Washington sued LuLaRoe and several of its executives accusing the company of being an illegal pyramid scheme and alleging that the company made deceptive claims to lure in people to become “consultants” for the company at an initial cost of as much as $9,000.  According to Attorney General Ferguson, people were told that they could earn up to $75,000 per year working only 20 hours a week and that some LuLaRoe consultatns earned as much as $500,000 per month.  These representations were misleading and false.

Pyramid schemes are disguised as purported businesses, however, if you carefully evaluate the business you will see that the primary source of profit for the business is in enrolling new members who pay fees to join the business.  The only profit for investors comes from bringing more people into the scheme.  In other words, the only way you can make a profit is by becoming a scammer yourself.  Like the chain letter, pyramid schemes are doomed to failure because eventually you run out of people to sustain the growth of the pyramid.

The scam does have some resemblance to how legitimate multi-level marketing companies such as Mary Kay Cosmetics and Amway operate; however, a key difference is that these companies actually sell products.  Pyramid schemes do not. In a pyramid scheme the source of profits is based primarily on the recruiting of new members or salespeople.

TIPS

A little common sense can go a long way in avoiding pyramid schemes.  The simple question to ask yourself is whether or not the company actually sells products and makes substantial profits through product sales or through the recruiting of new members.  If it is through recruitment, it is most likely a pyramid scheme. Anyone who is considering investing in what is represented to be a multilevel marketing business should always investigate the company and the terms of investment carefully before investing any money.   In the case of LuLaRoe, it received an F rating from the Better Business Bureau.   In addition, you should also check out the company with the FTC and your state’s attorney general to make sure that the company is legitimate before investing any money.  Here is a link to information from the FTC that you should consider before investing in a multilevel marketing business.  http://www.consumer.ftc.gov/articles/0065-multilevel-marketing

If you are not a subscriber to Scamicide.com and would like to receive daily emails with the Scam of the day, all you need to do is to go to the bottom of the initial page of www.scamicide.com and click on the tab that states “Sign up for this blog.”