Are Evolv and Multi Level Marketing Pyramid schemes?

Simply put no, however, it is understandable due to public perception that consumers and potential distributors would raise this question. Pyramid schemes are illegal in the United States.

A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, often without any product or service being delivered.

Pyramid schemes are illegal in many countries, including the United States, the United Kingdom, France, Germany, Norway, Albania, Canada, Romania, Colombia, Malaysia, Poland, Bulgaria, Australia, New Zealand, Japan, Italy, Nepal, Iceland, Philippines, South Africa, Sri Lanka, Thailand, Iran, the People’s Republic of China, Mexico, Portugal and The Netherlands.  These types of schemes have existed for at least a century. Nowadays, subtler schemes exist, whereby wealth is still attained by the owner, but not unless those at the base are also earning.

A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula which is used for profit. The essential idea is that the mark, Mr. X, makes only one payment. To start earning, Mr. X has to recruit others like him who will also make one payment each. Mr. X gets paid out of receipts from those new recruits. They then go on to recruit others. As each new recruit makes a payment, Mr. X gets a cut. He is thus promised exponential benefits as the “business” expands.

Such “businesses” seldom involve sales of real products or services to which a monetary value might be easily attached. However, sometimes the “payment” itself may be a non-cash valuable. To enhance credibility, most such scams are well equipped with fake referrals, testimonials, and information. The flaw is that there is no end benefit. The money simply travels up the chain. Only the originator (sometimes called the “pharaoh”) and a very few at the top levels of the pyramid make significant amounts of money. The amounts dwindle steeply down the pyramid slopes. Individuals at the bottom of the pyramid (those who subscribed to the plan, but were not able to recruit any followers themselves) end up with a deficit.

Some network or multi-level marketing businesses, which sell real products and rely on the price differentials between the manufacturer’s dispatch ramp and the retail counter, may verge on the borderline between “smart” and “scam”. However, legitimate network or multi-level marketing businesses can be distinguished from illegal pyramids by their compliance with these three criteria:

1. Substantial sales of products or services to end users
2. Commissions paid only on product usage, not on new enrollments
3. Company buys back the inventory of terminating participants

Other variations of pyramid schemes:

“8-ball” model

Many pyramids are more sophisticated than the simple model. These recognize that recruiting a large number of others into a scheme can be difficult so a seemingly simpler model is used. In this model each person must recruit two others, but the ease of achieving this is offset because the depth required to recoup any money also increases. The scheme requires a person to recruit two others, who must each recruit two others, who must each recruit two others.

The “8-ball” model contains a total of 15 members. Note that unlike in the picture, the triangular setup in the cue game of eight-ball corresponds to an arithmetic progression 1 + 2 + 3 + 4 + 5 = 15. The pyramid scheme in the picture in contrast is a geometric progression 1 + 2 + 4 + 8 = 15.

Prior instances of this scam have been called the “Airplane Game” and the four tiers labeled as “captain”, “co-pilot”, “crew”, and “passenger” to denote a person’s level. Another instance was called the “Original Dinner Party” which labeled the tiers as “dessert”, “main course”, “side salad”, and “appetizer”. A person on the “dessert” course is the one at the top of the tree. Another variant “Treasure Traders” variously used gemology terms such as “polishers”, “stone cutters”, etc. or gems “rubies”, “sapphires”, “diamonds”, etc.

Such schemes may try to downplay their pyramid nature by referring to themselves as “gifting circles” with money being “gifted”. Popular scams such as the “Women Empowering Women” do exactly this. Joiners may even be told that “gifting” is a way to skirt around tax laws.

Whichever euphemism is used, there are 15 total people in four tiers ( 1 + 2 + 4 + 8 ) in the scheme – the person at the top of this tree is the “captain”, the two below are “co-pilots”, the four below are “crew” and the bottom eight joiners are the “passengers”.

The eight passengers must each pay (or “gift”) a sum (e.g. $1000) to join the scheme. This sum (e.g. $8000) goes to the captain who leaves, with everyone remaining moving up one tier. There are now two new captains so the group splits in two with each group requiring eight new passengers. A person who joins the scheme as a passenger will not see a return until they exit the scheme as a captain. This requires that 14 others have been persuaded to join underneath them.

Therefore, the bottom 3 tiers of the pyramid always lose their money when the scheme finally collapses. Consider a pyramid consisting of tiers with 1, 2, 4, 8, 16, 32, and 64 members. The highlighted section corresponds to the previous diagram.

No matter how large the model becomes before collapse, approximately 88% of all people will lose.

If the scheme collapses at this point, only those in the 1, 2, 4, and 8 got out with a return. The remainder in the 16, 32, and 64 tier lose everything. 112 out of the total 127 members or 88% lost all of their money.

During a wave of pyramid activity, a surge frequently develops once a significant fraction of people know someone personally who exited with an $8000 payout for example. This spurs others to seek to get in on one of the many pyramids before the wave collapses.

The figures also hide the fact that the confidence trickster would make the lion’s share of the money. They would do this by filling in the first 3 tiers (with 1, 2, and 4 people) with phony names, ensuring they get the first 7 payouts, at 8 times the buy-in sum, without paying a single penny themselves. So if the buy-in were $1000, they would receive $56,000, paid for by the first 56 investors. They would continue to buy in underneath the real investors, and promote and prolong the scheme for as long as possible in order to allow them to skim even more from it before the collapse.

Other cons may also be effective. For example, rather than using fake names, a group of seven people may agree to form the top three layers of a pyramid without investing any money. They then work to recruit eight paying passengers, and pretend to follow the pyramid payout rules, but in reality split any money received. Ironically, though they are being conned, the eight paying passengers are not really getting anything less for their money than if they were buying into a ‘legitimate’ pyramid which had split off from a parent pyramid. They truly are now in a valid pyramid, and have the same opportunity to earn a windfall if they can successfully recruit enough new members and reach captain. This highlights the fact that by ‘buying’ in to a pyramid, passengers are not really obtaining anything of value they couldn’t create themselves other than a vague sense of “legitimacy” or history of the pyramid, which may make it marginally easier to sell passenger seats below them.

Matrix schemes

Matrix schemes use the same fraudulent non-sustainable system as a pyramid; here, the participants pay to join a waiting list for a desirable product which only a fraction of them can ever receive. Since matrix schemes follow the same laws of geometric progression as pyramids, they are subsequently as doomed to collapse. Such schemes operate as a queue, where the person at head of the queue receives an item such as a television, games console, digital camcorder, etc. when a certain number of new people join the end of the queue. For example ten joiners may be required for the person at the front to receive their item and leave the queue. Each joiner is required to buy an expensive but potentially worthless item, such as an e-book, for their position in the queue. The scheme organizer profits because the income from joiners far exceeds the cost of sending out the item to the person at the front. Organizers can further profit by starting a scheme with a queue with shill names that must be cleared out before genuine people get to the front. The scheme collapses when no more people are willing to join the queue. Schemes may not reveal, or may attempt to exaggerate, a prospective joiner’s queue position which essentially means the scheme is a lottery. Some countries have ruled that matrix schemes are illegal on that basis.

Notable recent cases

Internet

In 2003, the United States Federal Trade Commission (FTC) disclosed what it called an internet-based “pyramid scam”. Their complaint states that customers would pay a registration fee to join a program and purchase a package of goods and services such as internet mail, and that the company offered “significant commissions” to consumers who purchased and resold the package. The FTC alleged that the company’s program was instead a pyramid scheme that did not disclose that most consumers’ money would be kept, and that it gave affiliates material that allowed them to scam others.

Pyramid schemes may use email to persuade others that they are multi-level marketing (MLM) business plans. MLM plans—such as Amway, ACN, Mary Kay, Tupperware, Avon Products, MonaVie, and Pre-Paid Legal Services —are sometimes criticized, but remain legal by offering genuine products; pyramid schemes do not.

So how is Evolv and network marketing different?

Multi-level marketing (MLM), (also called network marketing) is a term that describes a marketing structure used by some companies as part of their overall marketing strategy.

The structure is designed to create a marketing and sales force by compensating promoters of company products not only for sales they personally generate, but also for the sales of other promoters they introduce to the company, creating a downline of distributors and a hierarchy of multiple levels of compensation in the form of a pyramid.

The products and company are usually marketed directly to consumers and potential business partners by means of relationship referrals and word of mouth marketing.

MLM businesses operate in the United States in all 50 states and in more than 100 other countries, and new businesses may use terms like “affiliate marketing” or “home-based business franchising”. However, many pyramid schemes try to present themselves as legitimate MLM businesses.

Because pyramiding (getting commissions from recruiting new members including “sign-up fees”) is illegal in most states, to remain legitimate in the U.S. a company that uses multi-level marketing has to make sure commissions are earned only on sales of the company’s products or services if they cross state boundaries. If participants are paid primarily from money received from new recruits, or if they are required to buy more product than they are likely to sell, then the company may be a pyramid scheme, which is illegal in most countries.

The European Union’s Unfair Commercial Practices Directive explicitly includes self-consumption as legitimate.

In a 2004 United States Federal Trade Commission (FTC) Staff Advisory letter to the Direct Selling Association states:

Much has been made of the personal, or internal, consumption issue in recent years. In fact, the amount of internal consumption in any multi-level compensation business does not determine whether or not the FTC will consider the plan a pyramid scheme. The critical question for the FTC is whether the revenues that primarily support the commissions paid to all participants are generated from purchases of goods and services that are not simply incidental to the purchase of the right to participate in a money-making venture.

In a 2007 Wall Street Journal interview, FTC economist Peter Vander Nat stated, “If people are buying because they want to use a company’s products, those sales can count as retail.”

The FTC offers advice for potential MLM members to help them identify those which are likely to be pyramid schemes.

For question and more information on Evolv – Team Moran, please email info@drinkandevolv.com.