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How does a pyramid scheme work?

Pyramid schemes are illegal methods of scamming consumers. They begin with a recruiter who creates a fake or fraudulent business. That individual then asks anyone who wants to join the business to pay a fee.

The people recruited then attempt to recruit more people to join the company for a fee. They keep a portion of the fee paid by the new recruit and pass the rest on to the owner of the business. Over time, more and more people join the business, but the flow of new recruits eventually ends. When that happens, people begin to lose their investments and the pyramid scheme ends.

Florida bans pyramid schemes under the Deceptive and Unfair Trade Practices Act. Specifically, chain referral sales techniques that require a consumer to buy a product or service for $100 or more are banned when the consumer is promised payments or commissions for recruiting new members.

Is a pyramid scheme the same as a multi-level marketing business?

There is a fine line between a pyramid scheme and a multi-level marketing business. There are some basic difference, though. For example, MLM businesses sell real products and don't rely on new recruits to bring in money. Many recruiters can bring in new people to work with them, but they may receive no referral fee unless the new recruit sells products.

What should you do if you're accused of running a pyramid scheme?

It's clear that there is a difference between scamming people out of money and running a legitimate business with an MLM structure. It's important that you can clearly define the way your business works and have products that you sell to bring in money. If recruitment is the only way you bring in funds, you could be investigated and may even be accused of being in charge of a pyramid scheme.

There are strong defenses that can be used to protect against federal charges based on allegations of running a pyramid scheme, but it's important that you work with your attorney to build a defense that is right for the case. Even if you're only part of an investigation at this time, it's important that you understand your legal rights and don't do anything that could constitute admitting to being involved in illegal activities. Your attorney can help protect you by being there with you for interviews and helping you know what to expect as a case moves forward.

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