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Steering clear of pyramid schemes

A lot of people are finding success in the newfound "gig" economy in the nation. Some use side jobs to supplement their regular income, while others find whole new careers.

Unfortunately, the popularity of the whole gig economy is making it easier than ever for pyramid schemes to take hold -- and you can end up getting pulled into illegal businesses far too easily if you don't know how to spot one.

Pyramid schemes involve unsustainable income

The classic pyramid scheme puts one or two people at the top. Those people recruit other people to join the plan through investment "fees" with promises of lavish returns.

The new people have to convince another layer of new people to join, paying the same fees. The money from the new recruits is used to pay the people who joined or "invested" earlier -- until eventually no one joins and the whole thing falls apart.

They often present as multi-level marketing campaigns

Multi-level marketing businesses (MLMs) abound -- and they're perfectly legal. People pay their fees for the license to sell a company's products. The problem is that many people can't tell the difference between MLMs and pyramid schemes.

How do you tell MLMs apart for pyramid schemes? Pyramid schemes often share certain hallmarks, including:

1. You have to pay a buy-in fee for nothing

If you don't know exactly what you're getting in return for your money, it's a bad deal.

2. Your income is based on your recruits

Revenues should come mostly from the sale of services or products to consumers -- not your recruitment efforts.

3. You're promised a lot for very little

Anything that promises you a lot of money for almost no effort is likely to be a scam of some sort. Be wary of "opportunities" that tell you all you need to do is advertise and sign up new recruits.

4. You can't understand the commission process.

There are plenty of real jobs that pay commission -- but the method should be easy to follow. If you can't seem to get a clear answer about commissions, don't invest.

Pulling your friends and family into a pyramid scheme is likely to be financially disastrous for everyone involved -- and you can face legal charges for fraud, acting as one of the scheme's promoters. If you have doubts about something's legitimacy, steer clear.

Source: FindLaw, "Pyramid Schemes," accessed May 30, 2018

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