The pandemic has drastically altered investment behavior, pushing plenty of fresh investors into the market, which observed a spike in stocks traded the week after stimulus checks were mailed to Americans. As unemployment rates continue climbing and no aid is forthcoming from the Feds, it’s understandable why some desperate people are turning to alternatives like MLMs (multi-level marketing), to try to scrape together some semblance of a living. However, these gigs aren’t quite what they seem. John Oliver’s Last Week Tonight offers an excellent deep dive into MLMs. Absolutely worth watching, but for anyone without 30 minutes to spare, there are some key differences to be aware of.
At first glance, MLMs may appear quite similar to pyramid and Ponzi schemes, but there are important distinctions. Pyramid and Ponzi schemes are illegal, as they’re essentially selling smoke and mirrors. Deception—no matter how elegantly dressed—is still fraudulent and criminal. The SEC agrees, which is why mega corporations like Enron, Worldcom and Lehmen Brothers were busted for wrongdoing and folks spent time behind bars.
MLMs may have become cultural fodder, but they aren’t illegal. Participants are unlikely to make much money, but they are ultimately selling a product. Whether it’s leggings, diet tea or essential oils, there is a tangible item to sell to customers. Enron, on the other hand, was selling fake investments. Real investments on the other hand, whether through the stock market or online equity crowdfunding portals, can be easily verified. They want potential investors to have access to information so they can make informed investment decisions. As such, company info (especially the financials) is easy to find.
Recruitment > product sales
For many who join MLMs, they feel as though the upfront cost to buy inventory is an investment in their professional future. Not quite. The core purpose of an MLM is to recruit others ‘downline’, in order to receive a small percentage of money and turn the gig into passive income. However, the constant need to recruit new members in order to maintain revenue levels is a red flag. Real investments like Apple or Microsoft don’t typically require the recruitment of new investors to maintain their stock price. They focus on innovation and product releases to maintain revenue and stock prices. Of course external factors such as the economy influence the price of stocks as well. But for MLMs, the pressure to recruit often far outweighs the push to move product, which ultimately results in a lose-lose situation.
Look under the hood
Companies listed on the stock market or online in the equity crowdfunding sphere, raise money by selling shares and/or securities. That’s a vastly different business model than that of multilevel marketing companies, which rely on recruitment to bring in money, and the spoils aren’t shared equally among participants. It’s common for MLMs to reward the sole few perched at the top, but that would be unthinkable in the real investment space. Imagine Apple only paying dividends to a select few of its investors while the others eat cake. Not bloody likely!
Always research and dig into a company’s information. And, there’s no need to be a math professor to be an investor; common sense plays an important role in investing. Remember, if it sounds too good to be true, it most likely is.