pyramid schemes

Sound Too Good To Be True? Spotting Pyramid Schemes in Wake of Covid-19

Since the pandemic, the FTC has seen an spike in pyramid schemes and multi-level marketing companies using the coronavirus to make deceptive recruiting claims

Desperate people often make desperate, costly decisions. And as millions have lost jobs due to the Covid-19 pandemic, some have turned to costly pyramid schemes in order to try and make ends meet . And sadly there are no shortage of multi-level marketing companies using the pandemic to profit on that fear, preying on those who have few alternatives to make money legitimately.

Usually framed as a “business opportunity,” pyramid schemes are illegal, get-rich-quick schemes that ask you to pay money upfront and then recruit others to join the scheme so you can you get a big payout. Some have products attached, but many don’t.

One such scheme currently making the rounds on social media is called “The Blessing Loom.” Someone on social media will ask their friends to join their “Blessing Loom,” or circle. To join you’re asked to pay $100 to the person in the middle of the circle. Once seven others join and pays $100 to the person at the center, that person gets $800 and leaves the circle. The circle then splits in half, everyone moves up a rung in the circle and you’re asked to recruit more people to join the outside. The process repeats until you’re in the middle, get your $800 and walk away.

Sounds simple, right?

Spoiler alert: Most never actually make it to the center of the circle, in part because you have to recruit so many to keep the scheme going.

The Blessing Loom graphic (for NBCLX)
The structure of the Blessing Loom, which has been called a scam by the Better Business Bureau.

“In times of financial crises, we certainly do see a lot of work from home scams,” said Kati Daffan, an attorney and assistant director of marketing practices with the Federal Trade Commission (FTC). “If people are losing their jobs, struggling financially, that’s something that we do see flourish.”

Many questionable "opportunities" are also coming from multi-level marketing companies. Known as MLMs or direct-selling companies, they often sell products through person-to-person sales without physical storefronts. But unlike pyramid schemes, many MLMs are legal. That’s because distributors make money from selling products, and distributors aren’t compensated just for recruiting people. But some MLMs are using the pandemic to make unsubstantiated earnings claims, such as you can earn five figures in just days.

Leticia Mercado, a single mother in Long Beach, Calif., was approached on Facebook by man she had met years ago when she bought life insurance. He wanted to tell her about an exciting job opportunity where she could make $80,000 in one year. Having been laid off from her three part-time jobs due to the pandemic, Mercado was grateful for the message. She was convinced “God had heard her prayers.”

“He contacted me and told me there was a really good business where I would just pay $500 [and] take a test,” Mercado said. “He spoke so nicely to me. He told me, you’ll bring in three people and start a chain. You’re going to make a lot of money, you’re going to be so happy, and you’re not going to have to do anything.”

Mercado paid an initial $300, took the test, attended a meeting—and that’s when things didn’t seem right.

“I realized the leaders were scolding people for not recruiting enough people,” said Mercado. “They were like, ‘Leticia has to bring in three people. And those three people have to bring in three other people.’ That’s when I realized this is a pyramid. What did I do?”

Mercado’s not alone. In April, the Federal Trade Commission sent warning letters to a number of MLMs demanding they stop using the pandemic to make false product and earnings claims.

The reality is the average MLM distributor makes only $5,702 a year, according to the Direct Selling Association, a trade organization that represents more than 100 direct-selling companies.

“Some [MLM] firms release data in what are called income disclosures,” said Stacie Bosley, a professor and economist at Hamline University, who’s studied pyramid schemes and MLMs extensively. “Not all firms do, and they’re not required to, but they do put out income disclosures that show the outcomes of participants. I don’t know that I’ve seen one yet that shows something other than the majority of people on balance, after expenses, losing money.”

For his part, Joe Mariano, the Direct Selling Association’s president and CEO, says he’s glad the FTC called out the MLMs it did.

“I was disappointed, but frankly not surprised,” said Mariano. “We’ve got literally millions of people who sell on a casual basis. You have a wide collection of people with varying degrees of experience, professionalism, enthusiasm, and in some instances, you may have people who do the wrong thing.”

So what can you do to spot a pyramid scheme or potentially fraudulent MLMs? Here are a few red flags you can look out for.

  1. The recruiter is asking for money upfront.
    “There shouldn’t be a significant or any upfront investment," said Mariano. “There are some costs for application fees or maybe a small sales kit. But if your costs are at all significant, big, big red flag.”
  2. The invitation to join this “exciting business opportunity” is out of the blue.
    “Somebody that you’ve known for a long time and who suddenly is very interested in your financial welfare—these are kind of all clues,” according to Robert Fitzpatrick, the president and CEO of
  3. There are extravagant earnings promises.
    If it’s over-hyped or being sold as an "opportunity of a lifetime,” Fitzpatrick said be wary.
  4. There’s a big emphasis on recruiting people.
    “If it’s built on that kind of recruitment strategy, by definition the vast majority of people will lose,” said Bosley. “It’s a mathematical reality. There’s no way around it.”
  5. There’s a low barrier of entry, an “anyone can join” mentality.
    “This ‘any person can do it’ has to be a red flag in and of itself,” said Fitzpatrick. “Well, if you take everyone, how is this going to work?”
  6. The recruiter is playing on your emotions.
    “They use trust and familial connections,” said Fitzpatrick. “All of a sudden it’s being leveraged, commercialized and used in a deceptive manner.”

In short, there are no financial shortcuts to wealth. And the advice your mother gave you as a child probably means more today than ever before: If it sounds too good to be true, it probably is.