Even though some elements of programs like multi-level marketing systems contain elements of a pyramid scheme, authorities will allow them to function since they pose less chance of risk to investors and the general public. Legislatures and courts are able to identify a distinct difference between programs that are legitmate, like multi-level marketing systems and illlegitimate programs such as pyramid of Ponizi ones.

In actuality, no clear line separates illegal pyramid schemes from legal multi-level marketing strategy. Between the two, regulators gauge the marketing strategy with an emphasis on recruitment vs.sales and the percent of product actually sold in comparison with the percent of commissions actually granted. Ponzi schemes function soley by paying previous investors monies that will be tendered by future investors. “Pyramid schemes” award people who join for getting other people to join the program, which in turn and over time, the structure of new joiners resembles a pyramid, as newer and bigger layers of people participate in the climb. In an opposite light, multi-level marketing programs survive by making monies off sales of an actual product, not new people who join. See In Re Amway Corp., 93 F.T.C. 618, 716 (1979).

Regulation of these combination schemes has been enacted because the programs will inevitably harm later investors.

The Federal Trade Commission has established a test for determining what constitutes a pyramid scheme. Such contrivances are characterized by the payment by participants of money to the company in return for which they receive (1) the right to sell a product and (2) the right to receive in return for recruiting other participants into the program rewards which are unrelated to sale of the product to ultimate users.

A test has been made up by the Federal Trade Commission to determine what makes up a pyramid scheme. The characters of such are: the right to receive rewards which are unrelated to the sale of a product to users, in return for getting other people to join the pyramid and also the right to sell a particular product.

A pyramid scheme is defined as: a fraudulent money-making scheme in which people are recruited to make payments to others above them in a hierarchy while expecting to receive payments from people recruited below them. Eventually the number of new recruits fails to sustain the payment structure, and the scheme collapses with most people losing the money they paid in. From the day the scam is initiated, a pyramid scheme’s liabilities exceed its assets. The only way it can generate wealth is by promising extraordinary returns to new recruits and the only way these returns can be paid is by getting additional investors. Invariably these schemes lose steam and the pyramid collapses.

Participating in, operating and offering, in any marketing or sales plan or program where a participant is given or promised compensation: (1) for inducing other persons to become participants in the plan or program, or (2) when a person induced by the participant in the plan or program. This is provided, that the term "compensation," as used in the above sentence, does not mean any payment based on actually consummated sales of goods or services to person who are not participants in the plan or program and who do not purchase such goods or services in order to resell them. In Re Koscot Interplanetary, Inc. 86 F.T.C. 1106 (1975).

Koscot's second factor, which is that an illegal pyramid rewards participants for recruitment, not for sales, implies that saturation must occur thus making the pyramid scheme inherently fraudulent and therefore illegal. It is this factor which is determinative in characterizing the plan or program as legitimate or illegal.

Operation of a pyramid scheme constitutes fraud for purposes of § 12(2) of the Securities Act of 1933, § 10 of the Securities Exchange Act of 1934 and various RICO predicative acts. Some of the most commonly charged criminal acts associated with Multi-Level Marketing systems are: securities, mail and wire fraud as well as money laundering

Possible Penalites

One may be found guilty of a felony, imprisoned for up to 5 years and fined up to $250,000.