“Wikipedia” defines Ponzi scheme as a “fraudulent investment where the operator generates returns for older investors through revenue paid by new investors, rather than from legitimate business activity or profit of financial activity”.It is characterized by
1.high returns usually short term and consistent.
2.When new investment dries up, the business goes under.In essence it uses the investment of the new recruit to pay old investor.
This is similar to the Ponzi scheme, but differs in some respects. Find below similarities and differences;
1.Here recruitment is indirect. It means the old investor is the one required to recruit others. In the Ponzi scheme, the Organizer directly does the recruitment.
2.There is an understanding that new money would fund the payout of compensation. Hence there is this drive for recruitment of new investors.
3.The pyramid scheme collapses faster than a Ponzi scheme. This is because it relies on the exponential increase in participants. The Ponzi scheme can survive longer when investors are lured with higher returns when they reinvest.
“Investopedia” defines MLM as a “strategy of direct sales companies use to encouragetheir existing distributors to recruit new distributors by paying them (existing distributors) a percentage of recruit’s sales. The recruits are called downlines”.
From the foregoing one can clearly see that Ponzi and pyramid schemes are fraudulent variations of multilevel marketing.
So how can one distinguish between a Ponzi/pyramid schemes and a genuine MLM?
Susan ward in her august 2017 article on “the balance” http://www.balance. com describes some red flags;
1.Pyramid schemes request investment of large sums up front.
2.pyramid schemes do not aim at creating a market for a product or service. Consumer demand is of no consequence to them
3.There is more emphasis on recruitment over selling of a business or a service.
For me these are the things I look out for.
1.Physical presence and geographic spread. Is there a physical address I can locate and “catch” the company I invested in if all goes awry?
2.Is the company a registered entity?
3.Do they have a web presence? What is their review rating? What do other people/companies /agencies say about them and their business/products.
4.Do they have a sell tangible goods /services?Anything I can hold on to, in case of default?
5.Is what they offer as interest too good to be true? It is my belief that no institution other than a financial institution can give me interest. So if you are not one, what can I hold on to, if I make an investment.