"Multilevel marketing plans, also
known as "network" or "matrix" marketing, are a
way of selling goods or services through distributors. These plans
typically promise that if you sign up as a distributor, you will
receive commissions -- for both your sales of the plan's goods or
services and those of other people you recruit to join the
distributors. Multilevel marketing plans usually promise to pay
commissions through two or more levels of recruits, known as the
distributor's "downline."
If a plan offers to pay commissions for
recruiting new distributors, watch out! Most states outlaw this
practice, which is known as "pyramiding." State laws against
pyramiding say that a multilevel marketing plan should only pay
commissions for retail sales of goods or services, not for recruiting
new distributors.
Why is pyramiding prohibited? Because
plans that pay commissions for recruiting new distributors inevitably
collapse when no new distributors can be recruited. And when a plan
collapses, most people -- except perhaps those at the very top of the
pyramid -- lose their money."
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