The SEC's Office of Investor Education and Advocacy is issuing this Investor Alert to warn individual investors about pyramid schemes, a type of investment scam that fraudsters often pitch as a legitimate business opportunity in the form of multi-level marketing programs.
Have you ever been tempted by an advertisement or offer to make "easy money" or "online income" out of your own home? Multi-level marketing ("MLM") programs are promoted through Internet advertising, company websites, social media, presentations, group meetings, conference calls, and brochures. In an MLM program, you typically get paid for products or services that you and the distributors in your "downline" (i.e., participants you recruit and their recruits) sell to others. However, some MLM programs are actually pyramid schemes -- a type of fraud in which participants profit almost exclusively through recruiting other people to participate in the program.
Pyramid schemes masquerading as MLM programs often violate the federal securities laws, such as laws prohibiting fraud and requiring the registration of securities offerings and broker-dealers. In a pyramid scheme, money from new participants is used to pay recruiting commissions (that may take any form, including the form of securities) to earlier participants just like how, in classic Ponzi schemes, money from new investors is used to pay fake "profits" to earlier investors. Recently, the SEC has sued the alleged operators of large-scale pyramid schemes for violating the federal securities laws through the guise of MLM programs.
When considering joining an MLM program, beware of these hallmarks of a pyramid scheme:
The SEC has taken emergency enforcement action to stop alleged pyramid schemes that violate the federal securities laws, including schemes disguised as MLM programs.
For example, in a recently filed litigation, SEC v. CKB168, the SEC filed charges to stop an alleged pyramid scheme perpetrated under the façade of an MLM program for online children's courses. The promoters of the scheme allegedly solicited investors worldwide, including targeting members of Asian-American communities in New York and California. The SEC alleges that these promoters misrepresented CKB as a legitimate and profitable MLM company that sells web-based children's educational courses when, in fact, CKB has little or no retail consumer sales and no apparent source of revenue other than money received from new investors.
In an adjudicated settled action, SEC v. Rex Venture Group, the SEC shut down a $600 million fraud that duped approximately one million Internet customers through a complex investment scam involving a Ponzi scheme promoted as a daily profit-share pool and a pyramid scheme pitched as an MLM program for Zeekrewards.com, the self-described affiliate advertising division for zeekler.com, a penny auction website. The SEC alleged that, for the pyramid scheme component of the scam, the defendants promised bonuses and commissions to customers for enrolling in a monthly subscription plan and recruiting others to join the plan. However, according to the SEC's complaint, new customers' funds were pooled and used to pay recruiting bonuses to existing customers because there was no substantial legitimate revenue from product sales.
Pyramid schemes cannot be sustained and always collapse eventually. Protect yourself and your money by steering clear of any "opportunity" bearing warning signs of a pyramid scheme.
To report a possible securities fraud, ask a question, or report a problem concerning your investments, your investment account, or a financial professional, please visit http://www.sec.gov/complaint/select.shtml.
To receive the latest Investor Alerts and Bulletins from the SEC's Office of Investor Education and Advocacy, sign up for our RSS feed at sec.gov/rss/investor/alertsandbulletins.xml or for email at sec.gov/news/press/subscribe_updates.htm. You can also follow us on Twitter @SEC_Investor_Ed, or visit Investor.gov, the SEC's website dedicated to individual investors.
The Office of Investor Education and Advocacy has provided this information as a service to investors. It is neither a legal interpretation nor a statement of SEC policy. If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.