Pyramid Selling

A fuller discussion on the phrase ‘pyramid’ selling will be found later on in these articles, but for historical accuracy I should mention here.
The first widely-reported ‘pyramid ‘ scheme on record was one created in the USA in 1920 by Charles Ponzi. He stated that he was able to offer extremely high rates of return to investors, supposedly from buying and selling international postal reply coupons at differing rates due to the effects of the first world war.

He sold promissory notes quoting 50 per cent return within ninety days but never bought any coupons with the money. He merely used the money from later entrants to the scheme to pay off earlier ones!
Many early investors were delighted to receive their promised returns much sooner than ninety days, and the scheme was phenomenally successful in the nine months before he was arrested for fraud and jailed. In those nine months he had received more than $9,000,000 – although he probably owed ten times more that amount to the later investors in the scheme, who had not been paid out.

Fifty years on, the continued success of Amway, Shaklee, and other genuine companies in the USA operating similar sales structures did not go unnoticed by a number of unscrupulous business men. They realized that the multi-level concept, when manipulated away from the original intention of rewarding retailing success, could be used to make money from people without bothering too much about retail sales of quality products to a satisfied clientele.
Thus ‘Pyramid selling’ was born. Many variations on the scheme were witnessed, some involving reasonable products and many not, but all were based on one more of these ingredients.

Large entry fees extracted from people on the understanding that they would profit by receiving many similar payments from new entrants that they introduced.
encouragement to purchase as large an inventory of products as possible at the highest discounts available, before obtaining orders from customers or their distributors, and with no refund policy.no written contract between company and distributors:
No training in, or any real concern about, selling products to the public

Many gullible people (and some not so gullible) found themselves persuaded into spending their life savings on entry fees and enormous amounts of products. After the initial excitement and dreams of wealth they realized that they were incapable of selling all the products to customers, or of persuading others to join in the scheme, and stories of bankruptcies and garages full of unsold products became familiar.

Pyramid selling soon found its way to the UK and by the early 1970’s the problems it was causing and the publicity it was been given prompted parliamentary action. The Pyramid Selling Schemes Regulations 1973 were drawn up to put a stop to the worst excesses of the pyramid operations prevalent at the time.


They laid down in detail what was to be contained in any advertisment for such schemes, and what information should be included in certain documents issued by the promoters. They required written contracts to be provided to all participants, containing certain rights, such as termination without penalty and the possibility of having unsold stock bought back by the promoter of the scheme on termination of the contract.

They imposed a maximum limit of £25.00 on the amount of money that could be accepted by anybody from a participant who had been in the scheme for less than seven days and prohibited non-returnable deposits for goods. Training facilities were to be provided free of charge, as this was another area where promoters of pyramid schemes had abused participants.

The regulations were effective in bringing to a close this unfortunate chapter in the development of multi-level marketing, even though there were very rarely used against problem promoters.
By this time they had probably made their killing and were planning other fraudlent schemes.
They were genuine LMLM companies in operation throughout the time of the pyramids, and they took part in the Department of Trade and Industry’s consultations about the regulations. They needed no substantial alterations in their systems to comply with the new rules; indeed, their operations were probably used as a basis for the new regulations.

One should not be complacent, though. It is not unknown for distributors to operate their company’s marketing plan in a manner resembling that described above, even though the company itself has fully complied with the lad. Additionally, at any time there are hundreds of schemes being promoted which are no different in principle from the Ponzi scheme. But more on this in later chapters.

Reference: Multi-Level Marketing: Peter Clothier

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