When people learn of a business that encourages recruiting they often assume it to be a pyramid scheme, when in fact it may just be another multi-level marketing company. While both may give incentives to their reps for recruiting others, one is illegal while the other is simply frowned upon by those not trusting of “get rich quick” ventures.
Pyramid Scheme Act
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Utah’s Pyramid Scheme Act defines a pyramid scheme as “any sales device or plan under which a person gives consideration to another person in exchange for compensation or the right to receive compensation which is derived primarily from the introduction of other persons into the sales device or plan rather than from the sale of goods, services, or other property.” Anytime the recruiting is the only reason or main purpose of the business, versus selling products or services, charges for violation of the Pyramid Scheme Act may result.
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Multi-marketing businesses, otherwise known as direct-sales or network marketing, suffer from the bad reputation of pyramid schemes as they have similar business approaches. Multi-level marketing mimics a pyramid scheme model since the business thrives when recruits are encouraged to sign on. Those recruits can recruit others and so on. Those individuals who are higher up the recruiting ladder earn money from those on lower levels. This may sound exactly like a pyramid scheme, however the money that those in multi-marketing businesses make isn’t made strictly by recruiting; there is actually a product to be sold. In fact, most of the income is made from the sale of products or service. Certainly, those at the top earn more money in the long run than those who are newly recruited, but the business plan is appropriate and legal.
Trouble for genuine businesses
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Multi-level marketing is usually done from home, online, or door to door sales. Unfortunately, because multi-level marketing representatives don’t have a specific business location or warehouse where products are stored, it may be harder to prove that their business has a product to sell. Not having the product on hand can make it difficult to prove that it is an authentic business, versus a pyramid scheme. This is especially difficult for businesses that are just starting out, and may not have thought out their product thoroughly. Many play it safe by hopping on the bandwagon of some of the major well-known multi-level marketing companies such as:
• Mary Kay
• The Pampered Chef
Others with an entrepreneur spirit choose to create their own business or go with companies that are just getting started. This is where many run a risk of facing pyramid scheme charges.
Penalties for running a pyramid scheme
According to Utah Code 76-6a-4 or the Pyramid Scheme Act, “Any person who knowingly organizes, establishes, promotes, or administers a pyramid scheme is guilty of a third degree felony.” Persons charged with a 3rd degree felony may face up to 5 years in prison and a fine of up to $5,000.
Jail time just for participating
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Time behind bars isn’t only for those who are the masterminds of the pyramid schemes. Up to six months in jail can result from a person who merely joins the illegal business model. This is also discussed in Utah Code 76-6a-4. “Any person who participates in a pyramid scheme only by receiving compensation for the introduction of other persons into the pyramid scheme rather than from the sale of goods, services, or other property is guilty of a class B misdemeanor.” When creating or joining a multi-level marketing company, make certain that the company is doing everything possible to avoid pyramid scheme charges. For individuals who planned a business before considering the product, or for those who got caught up in a scheme that turned out to be illegal, contact a criminal defense attorney.