Office of the

Attorney General

Pyramids, Gift Schemes

& Network Marketing

JUNE 2003

LAWRENCE WASDEN

Attorney General

Statehouse

Boise, ID 83720-0010

www.ag.idaho.gov

State of Idaho

Office of Attorney General

Lawrence Wasden

INTRODUCTION

Pyramid schemes are among the oldest and most common

consumer scams. While pyramid schemes may be

disguised as “gift” programs or “networking” plans, they

have certain things in common. Pyramids are illegal.

Pyramids will fail. People will lose money.

Network marketing companies (also called multi-level

marketing companies), on the other hand, are lawful and

legitimate businesses. The challenge is determining

whether a particular plan is a legitimate multi-level

marketing opportunity or an illegal pyramid scheme.

My office has prepared this brochure to help you

understand the differences between legal and illegal

business plans. I hope it is helpful. If you have additional

questions, please contact my Consumer Protection Unit.

Sincerely,

LAWRENCE G. WASDEN

Attorney General

PART I: ILLEGAL PYRAMIDS

What is a Pyramid Scheme?

A pyramid scheme is an illegal moneymaking venture. The

name comes from the pyramid shaped structure of the

scheme. In a typical pyramid scheme, a few participants at

the top of the pyramid recruit new participants for the

bottom. The new recruits pay money to enter the scheme

and must recruit additional participants to keep the

pyramid alive. A pyramid scheme simply circulates

money among participants. It does not create new wealth.

Although a few people might come out ahead, many more

will lose money when the pyramid collapses. As the

pyramid expands, it requires recruiting new members at a

geometrically expanding rate.

Because there are only so many people in the world, it is

mathematically impossible for pyramid schemes to

continue indefinitely. A pyramid that is built when each

participant gets six other people to join would require

10,077,696 participants at the ninth level!

Idaho law prohibits all pyramid schemes because they

deceive and cheat consumers.

Pyramid Reality

Pyramids are illegal. There is a real risk that law

enforcement authorities will shut down a pyramid scheme.

Participants can be fined and arrested.

Pyramids are deceptive. Whether they intend to or not,

participants in a pyramid deceive those they recruit. Few

people would be fooled into joining if the risks were fully

explained.

Pyramids are losers. Pyramids are based on simple

mathematics: many losers pay a few winners.

Legal Consequences

Promoting or participating in a pyramid scheme violates

the Idaho Consumer Protection Act. It is also a felony in

Idaho. By participating you could end up with a criminal

record. In Idaho, a felony crime is punishable by up to 5

years in prison, a fine of up to $50,000, or both. Violators

of the Consumer Protection Act are subject to civil

penalties of $5,000 per violation.

PART II: “GIFT” PYRAMIDS

Pyramid schemes have been “packaged” in different ways

at different times. In recent years, promoters have

described their pyramid schemes as “gifting programs.”

Some have falsely claimed that the Attorney General’s

Office has approved their scheme. In fact, the Attorney

General’s Office has never approved any business

opportunity. If anyone tells you his or her plan is approved

by the Attorney General’s Office, you should a) assume

the plan is a scam and b) report the misrepresentation to

the Consumer Protection Unit.

The Pitch

Usually a relative, friend or acquaintance will approach

you with an “opportunity” to help yourself and those you

care about. They will tell you that you can reduce your

financial burdens simply by making one monetary "gift."

In return, you’ll be told that you will receive many times

the amount of your initial gift. Often you will be told that

some portion of the money will benefit a good cause.

Don't fall for it. It is illegal. The odds are that you and your

friends will lose money. If it sounds too good to be true, it

probably is.

Pyramid promoters take advantage of group psychology.

They often hold recruiting meetings where they create a

frenzied, enthusiastic atmosphere. They use peer pressure

and promises of easy money to play on people’s greed.

They warn that you could miss out on the deal of a

lifetime.

It is Not a Gift

Although payments in pyramid schemes are often referred

to as "gifts," in reality they are not gifts because the

“giver” expects to receive much more money.

Many pyramid promoters claim that Internal Revenue

Service code concerning monetary gifts supports their

contention that the program is legal. Do not believe these

claims. If you have questions about their legality, call the

IRS Support Line at (800) 426-4741.

While it is legal to give monetary gifts of up to $10,000

without causing a taxable event, true gifts are given with

no strings attached and with no expectation of something

in return. That is not the case with "gift" schemes. Such

payments are taxable income. Furthermore,

misrepresenting the nature of the payment is deceptive and

violates Idaho law.

PART III – NETWORK OR MULTI-LEVEL

MARKETING

“Network Marketing” Companies

Legitimate network (or multi-level) marketing companies

differ from pyramid schemes because they generate new

wealth through the sale of goods and services to non-

participants. Pyramids, by contrast, depend on re-

circulating the money of new participants. While network

marketing companies and pyramids use the same

organizational structure, network marketing companies are

designed to sell products, rather than participation.

A network marketing company whose primary emphasis is

to build a sales force rather than to sell the company’s

products to customers outside the company may be an

illegal pyramid scheme.

The Difference Between Pyramid Schemes and

Network Marketing

Because pyramid promoters know that pyramid schemes

are illegal, many try to disguise their schemes as legitimate

network marketing companies by offering a line of

products and claiming to be in the business of selling them.

This can make it difficult, at times, to distinguish between

an illegal pyramid scheme and a legitimate network or

multi-level marketing opportunity. To discern the

difference, it is often necessary to carefully analyze the

way the company is marketed and the way it does business.

In some cases, for example, the product may be worthless,

something no one would buy except as a reason to

participate in the scheme. Or, the product may be over

priced. This price premium is actually a hidden pyramid

scheme participation fee.

In other cases, the product may have some value but new

participants are encouraged to buy larger amounts than

they can sell in order to meet high sales quotas. This

practice is known as “inventory loading.” Sometimes the

participation fee may be disguised as expensive “training.”

In pyramid schemes, the emphasis is on building up the

organization and the number of participants, not selling the

products to customers. Pyramid schemes depend on

making money from the participants rather than from sales

to those outside the company.

Questions to ask yourself:

• Are you being pressured to make a hasty decision?

If so, it may be a pyramid scheme. A legitimate

network marketing opportunity will still be available

next week.

• Could you make money by selling the product to

customers, without recruiting anyone to sell for you?

If not, it may be a pyramid scheme. Pyramids

emphasize recruiting over selling. Network

marketing emphasizes selling.

• Are training materials and other sales aids provided

to you at cost? If not, it may be a pyramid scheme.

If the company is truly interested in product sales, it

will make money from your sales rather than from

your training.

• How long has the company been in business? There

is a very high failure rate among all new businesses.

However, a number of new ventures claiming to be

network-marketing companies fail because they are

really disguised pyramid schemes and,

consequently, collapse.

• Does the company require you to certify that you

have sold most of your previous inventory before it

sells you new products? If not or if you are

encouraged to “fudge” the figures, it may be a

pyramid scheme. Legitimate network marketing

companies don’t load you up with inventory.

• Will the company repurchase your unsold inventory

for at least 75 percent of your cost? If not, it may be

a pyramid scheme. Read the fine print carefully.

Ask to talk with someone who has actually returned

inventory to the company.

• Is the emphasis on recruiting or on product sales? If

it’s on recruiting, the company may be a pyramid

scheme. Even with a network structure, a multi-

level company still needs to sell products to

customers in order to succeed. In established

network or multi-level companies, only a small

percentage of the distributors actually build sales

organizations.

• How many people are already signed up as

marketing representatives in your area? Too many

representatives in one area can saturate markets. If

the company is already recruiting heavily in your

area, how likely is it that you will be successful

recruiting additional representatives?

• Are you told that people are making lots of money

with only minimal effort and that you can too? If so,

it may be a pyramid scheme. While network

marketing may be a good business opportunity for

the right person, it is not a get-rich-quick scheme.

Network or multi-level marketing can be a legitimate way

for you to acquire products. It can also be a way to build

your own business. But in a crucial way it is the same as

most businesses. Success comes only with hard work.

There is no shortcut to wealth.

Remember, pyramids are illegal. Network marketing

companies are legal. If you have any doubt about whether

a business opportunity is an illegal pyramid, you should

contact the Consumer Protection Unit or consult a private

attorney before you participate.

CONCLUSION

Do not be pressured into joining a pyramid scheme. Once

you turn over your money it is very difficult - if not

impossible - to recover it.

If you have questions about pyramids please call

(208) 334-2424 or, toll-free 1-800-432-3545, TDD access

is available.

Or, contact us by mail:

Office of the Attorney General

Consumer Protection Unit

P.O. Box 83720

650 West State, Lower Level

Boise, Idaho 83720-0010

www.ag.idaho.gov

Funds collected by the Attorney General’s Consumer

Protection Unit as the result of enforcement actions paid

for this pamphlet. No tax monies were used to pay for

this publication.

The Consumer Protection Unit enforces Idaho’s

consumer protection laws, provides information to the

public on consumer issues, and offers an informal

mediation process for individual consumer complaints.

If you have a consumer problem or question, please call

208-334-2424 or in-state toll-free 1-800-432-3545. TDD

access and Language Line translation services are

available. The Attorney General’s web site is available