The Securities and Exchange Commission (SEC) recently issued a warning to investors cautioning them against pyramid schemes that masquerade as multi-level marketing (MLM) programs. MLM programs are legitimate marketing strategies where the salespeople are compensated not only for sales they actually make, but also for the sales that are made by the other people they have recruited to join the MLM.
The SEC warned investors against hastily participating in what appears to be a MLM program because they could potentially be illegal pyramid schemes. Careful consideration should be given to distinguish the two, as pyramid schemes can potentially violate securities laws which prohibit fraud and require registration of securities offerings. In pyramid schemes, money from new recruits is used to pay the commissions of existing recruits.
The SEC asks investors to consider the following before joining a MLM program:
- Is there a genuine product or service?
- Is the MLM program promising a high return quickly?
- Is the company promising to pay highly for little work?
- Ask to see company’s financial statement to ensure demonstrated revenue sales.
- Are you asked to buy-into the company?
- Does the company have a complex commission structure?
- Is the company emphasizing recruitment?
If you answered yes to any of these considerations, you might be in danger of joining a pyramid scheme. These questions are there to help you decipher between legitimate MLM programs and pyramid schemes.
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The SEC issued this warning in light of its recent charges against California resident Steve Chen 13 California based-entities at the center of a $32 million pyramid scheme. According to the SEC report, Chen and his entities allegedly misled investors into believing that their company was backed by lucrative amber deposits in Argentina worth billions of dollars. According to the SEC, Chen falsely presented his company as a multi-level marketing company and raised $32 million dollars from investors.
Because of these charges, the SEC wants to protect investors from any future fraud and especially from pyramid schemes disguised as multi-level marketing programs.
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