Some direct sales organizations employ the MLM scheme as a strategy to entice their current distributors to sign up new distributors. In order to motivate current distributors, a portion of the sales made by new recruits is paid to them.
On the other hand, Ponzi schemes are fraud techniques involving a dormant business. However, the payment of prompt returns to beginning investors from the money invested by later investors reassures the faith in the success of this “business.”
The following are some significant distinctions between Ponzi and marketing schemes:
Ponzi schemes’ cash flow against MLMs‘:
A Ponzi scheme places complete operational control in the hands of the individual who sets up the fraud.
Because money is just transferred from one participant to another in the financial markets, there are no actual investment opportunities.
However, with multi-level marketing, participants are given an incentive. This incentive is framed as a business opportunity, such as the right or chance to sell a particular good.
Each investor pays the person who signed them up for this opportunity to sell the advertised goods, and the one who receives the funds is required to split the profits with those higher up the pyramid.
Guaranteed payment:
In a Ponzi scheme, those who want to participate must first pay a fee upfront before they can receive a reward. Instead of selling tangible goods, these participants mostly profit from enrollment fees.
However, to join an MLM business, applicants must also pay a price upfront. The difference is that MLM participants always profit from both the charge for joining the program and the sale of items.
Legality:
Regarding the legality of each plan, MLM is thought to be only a marketing scheme with valid products to be sold and is thus thought to be lawful. In contrast, Ponzi schemes are thought to be fraudulent investment management services and are thus illegal.
Despite being promised extremely high returns and luxurious lifestyles, many people have lost a significant amount of money to Ponzi schemes AND MLM methods.
Some schemes even promise and guarantee returns for participants, even claiming that participants would be able to leave their employment quickly because they anticipate earning a very large return in the future.
The structures of the MLM scheme and the Ponzi scheme are distinct.:
Undoubtedly, no underlying product is offered in a Ponzi scheme setup. When investors seek their money back, they are compensated with inflowing funds supplied by later investors.
Investors contribute their money to the portfolio manager (also known as the fund manager), who guarantees high rates of return (relative to other financial instruments).
However, in MLM, the commission is given to distributors at different levels after they sell a tangible good. In MLM, the initial participant is required to find further investors who will find more investors, who will find even more investors, and so on.
Associated risks:
Regarding the dangers involved with each plan, a Ponzi scheme involves the sale of a fictitious investment rather than a physical good. MLM, however, is a conduit for the sale of tangible goods.
The risks involved with Ponzi schemes are higher than those involved with MLM scams since there is no underlying product in them.
- Examples:
— Multi-level marketing companies:
Amway is an illustration of a well-known direct-sales corporation that makes use of multi-level marketing.
Herbalife Ltd., a manufacturer, and provider of weight-loss and nutritional goods with more than 500,000 distributors is the most well-known multi-level marketing corporation to defend its methods. 80% of Herbalife participants, according to the company, do not seek out new members.
— Ponzi schemes:
The longest-running Ponzi scheme was run by Bernie Madoff. Investors deposited $17.5 billion into his “investment business” over the course of 20 years.
When investors tried to get $7 billion out of the plan during the 2008 financial crisis, it was discovered.
Madoff was unable to pay them back because of his $300 million net wealth. With his guilty plea, he received a 150-year sentence. At 82, Madoff passed away in custody on April 14, 2021.
