The concept of networking, whether in the virtual or real world, is basically the same. The purposes may be different (e.g., professional, personal, business, dating), but the general concept is the same – to link people/entities for optimum utilization of resources. In the real world (and in this side of the world), we have been exposed to the more common kind of business networking: the multi-level marketing (MLM).
MLM is a very effective business strategy, which is the reason why many companies utilize it. It is important to point out that MLM, per se, is not illegal. However, due to the increase in number of fraudulent transactions using variants of the MLM strategy, the Securities and Exchange Commission (SEC) issued guidelines defining and governing it.
The more common among the illegal variants is the pyramid; hence, the pyramiding scam. In pyramiding, as characterized by the SEC (read the SEC Advisory on Pyramid and Ponzi Scams), the promoters (who are on top of the entire structure) entice others down the line (“downlines”) to bring in others in an ever-widening triangle, so that the top feeds from those at the base. It is only a matter of time before new recruits will run out, and the whole triangle collapses. Administrative and criminal cases have been filed against certain companies, as well as their responsible officers. If cases were filed, it obviously means people already parted with their hard-earned money.
So, before it is too late, a potential investor (whether someone who wants to set up an MLM company or one who wants to invest in it) must study the guidelines, as well as the pitfalls, of MLM (the guidelines will be the subject matter of another post).
Anyway, here are some of the suggestions from the SEC (also sourced from the US Federal Trade Commission):
- 1. Avoid any plan that includes commissions for recruiting additional investors.
- 2. Be cautious of schemes that claim you will make more money through the growth of your downlines, rather than sales of products you make.
- 3. Beware of plans that require new investors to purchase expensive inventory. (The usual selling approach is this: if you are not using our product, how can you convince your buyers?)
- 4. Check with the local business bureau. (This is not really fool-proof, because those pyramiding companies have regular incorporation papers and permits).
We always go with the time-tested cliche: If it’s too good to be true, it usually is.
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