✔️ Information reviewed and updated in February 2024 by Pedro Martínez González
Today there are a large number of businesses available for people to start the wonderful path of entrepreneurship. Unfortunately not all schemes like Multilevel and Ponzi Scheme are as good as they seem and others, although misleading, are not illegal.
Here we will talk to you about two widely known modalities in the business world, but which also have many points against them, or not? That's right, we will explain everything you need to know, both about the Ponzi scheme and the so-called multilevels. In addition, we will tell you how to know if you are in one.
The Ponzi scheme is a method created to scam people, of course, which was invented by the Italian Carlos Ponzi. Basically it is a person in charge, whose task is to recruit more people promising huge profits in a short time.
These people give a contribution and then they have to find more people to invest in the business so that a chain or a kind of pyramid is made. In the end, the money comes from the new links or investors, it is never invested or profits are generated. When they stop depositing, the Ponzi scheme collapses.
How do I know if I am in a Ponzi Scheme?
These 4 points will tell you:
- If they promise you a lot of money in a short time and with benefits above the market average.
- The company has very little legal documentation, as well as information on services, location, etc.
- It is not registered or regulated by any government entity such as a tax body, property registry, stock exchange, etc.
- They deceive you by showing you the luxurious life of their investors and the large amount of money they generate, but they never tell you how it is actually generated.
The multilevel scheme is a bit different. Here companies invite their customers to become distributors, these in turn add their own clients, thus creating a network of distributors. For example, I am a Herbalife distributor and at the same time I have 5 smaller distributors. Herbalife ships product to me and I to them.
Here we have a great deal for companies whose risk is outsourced, since those who lose out if they don't sell are the distributors. This scheme, although misleading and unfair, is not illegal, in fact, there are people with large distribution networks under this scheme.
How do I know if I am in a multilevel?
Just read these 4 points:
- Motivation is a fundamental part, they make you believe that you are a leader and an entrepreneur.
- Recruiters target financially distressed people under high profit promises.
- They ask you to consume a product of which, you will have to buy a kit or a fixed amount of stock.
- The investment can be high due to the amount of product they ask you to buy. They will convince you in any way to buy by promising quick profits and easy sales.
➡Differences between the Ponzi scheme and the MLM✨
Although they are essentially similar, there are actually big differences between the Ponzi scheme and the MLM system. It is important that you know them because that way you will know when to differentiate one from the other and, above all, you will avoid falling into deceptions and traps.
- Objectives: The objectives of both schemes are totally different. In multilevel, recruiters focus on attracting new customers in order to sell more products. On the other hand, The Ponzi scheme aims to attract more investors, since people's money is what moves the chain.
- Sources of money: The Ponzi scheme has investors or new entrants as a source of money Well, let's remember that at the beginning you must make a contribution which goes up the chain. In the case of multilevel, the income usually comes from the sales of its partner-distributors and from services offered.
- Access fees: Although at the beginning the investment required may be high, in the multilevel scheme there is no access fee as such. On the other hand, in the world of the Ponzi scheme, the initial fee is high, since the money must be distributed.
- Products: The Ponzi scheme does not have a productRather, it misleads you with the promise of profit through investments in financial instruments. On the other hand, the multilevel does use products in its scheme offering all kinds of them. Herbalife is a great example with its different naturopathic supplements.
- Warranties: A good number of companies that work by multilevel, offer guarantees on their products. This means that, in the event of poor quality, failure, etc. They answer for the merchandise purchased. The Ponzi scheme does not have any type of guarantee so if the investment fails, goodbye money!
- Promises of wealth: In the Ponzi scheme, the "gurus" will invite you to invest with the promise that you will earn money quickly and in a short time. On the other hand, in the multilevel scheme you can have profits, but in the long term, since setting up a distribution network takes time.
- Information: Finally, you should know that in the Multilevel or pyramid scheme you will be able to know where the profits come from and how the business works. In the case of the Ponzi scheme, there is no transparency as it is a scam so you will not be able to know where the money comes from.
➡Are these “business models” illegal? ✨
Ponzi schemes are totally illegal and are prohibited by most countries as they are considered a scam. On the other hand, companies that work in a pyramidal or multilevel way are allowed as long as they are clear with their operation.
If you have been invited to a multilevel company and you see that something is wrong, that they are not totally clear and there are confusing rules, the best thing is to get out of there. The US Federal Trade Commission recommends not getting involved in companies where your earnings will depend on the number of partners or distributors you get.