Everything You Need to Know About Spotting and Avoiding Pyramid Schemes and MLM Scams

Pyramid schemes and shady multi-level marketing companies make deceptive recruiting claims, misleading you into how much money you'll make and often costing you. Here's what to watch out for.

There are many people who want to prey on the desperate or those deluded with the promise of getting rich quick.

But a lot of these promises can be too good to be true, and getting involved in a pyramid scheme organization to make ends meet could end up costing you. Sadly there is no shortage of multi-level marketing companies preying on those paid low wages, who have few alternatives to expand wealth legitimately.

Here's what you need to watch out for to avoid getting scammed.

Pyramid schemes like the 'Blessing Loom' are illegal—here’s why

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 current pyramid scheme that has made the rounds on social media is called “The Blessing Loom,” also known as the Circle Game or Money Board. 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.”

MLM companies can also be pyramid schemes

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 have used the coronavirus 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.”

Be wary of multi-level marketing schemes, say the co-directors of "LuLaRich," a docuseries about the LuLaRoe leggings company. The documentary unpacked the origins of the company and the problems with its promises that sellers of the leggings would make at least $5,000.

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.”

Is it a pyramid scheme? Look out for these common signs

So what can you do or what questions can you ask 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 PyramidSchemeAlert.org.
  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.