Difference between Scam and Legit Schemes

Updated: Apr 24

What are the differences between pyramid schemes and multi-level marketing? How legit are referral programs? What is Ponzi scheme? How not to get skunked? How to avoid fraudulent scam online?

Pyramid Scheme vs MLM and Referral Program

Pyramid Schemes: Fraud

With the expansion of the internet the number of scammers and fraudulent offers increased dramatically. One of the most disguised scam programs are pyramid schemes, such as a Ponzi scheme. The first such fraud was operated by Charles Ponzi in 1919, and the schemes keep evolving to deceive investors ever since.

A Ponzi scheme is an investing scam which promises high return rates while claiming that there is zero or little risk to investors. While the Ponzi scheme produces income for early investors by signing up new investors, it breaks down inevitably. Similarly to other pyramid schemes, a Ponzi scheme uses the funds deposited by newly signed up participants to pay the earlier investors.

Eventually, all types of pyramid schemes collapse when the inflow of new participants decreases, and there is not enough funds to go around.

MLMs and Referral Programs: Legit

Another program that is sometimes confused with a pyramid scheme is Multi-Level Marketing (MLM). Nonetheless, MLMs are not illegal as they offer real services or tangible products.

Similarly to MLMs, Referral Programs reward its participants for attracting new customers who open new accounts to buy a product or sign up for a service. New consumers receive sign up discounts, while people who invited them receive rewards as well. The business benefits from new customers, so they have the opportunity to reward you for bringing in new buyers or subscribers. Referral Programs that are run by established and trustworthy companies are legal, and in contrast to MLMs the participants are not required to pay money upfront to take part in the program.

How to Tell the Difference?

There are several key differences between pyramid schemes (including Ponzi scheme), MLMs, and Referral Programs. Let’s take a deeper look at these.


MLM attracts participants as it offers the opportunity to endorse a product or service and distribute it to consumers. Participants don’t need to start a business from scratch, while they have support of the direct selling company that provides the product and sometimes offers training as well. In most pyramid schemes, investors are aware that they are responsible for recruiting new members, and that each sign up or new registration is already the actual source of profit for existing members. Ponzi schemes often conceal their nature and make its members believe that they invest in actual securities.

By contrast, Referral Programs offer you to attract new customers to the service you are already using. This type of program is perfectly legal and legit. Participants who already use the service are incentivized to share their referral codes to invite their friends to sign up. Since the members are the users of the service and often are paying subscription fees for this service, they virtually do not spend money for participation in the Referral Program.

Source of Incentives

In all types of pyramid schemes, including Ponzi schemes, existing members receive compensation from the investments made by new participants. MLMs and Referral programs offer compensation for the sale of actual product or service. While in MLMs you pay to participate and receive rewards only for brining in new consumers, in Referral Programs you are already the user of the service and may gain extra benefits by inviting new members to open a new account online.


Pyramid schemes normally collapse quickly, as their sustainability depends on rapid growth. Ponzi schemes can exist for decades, provided that there are enough investors to support it. A notorious example of the Ponzi Scheme is the one orchestrated by Bernie Madoff who was involved in an nearly $65 billion fraud from the 1980s to 2008.

How to Protect Yourself?

There are several points you want to consider to realize if you are getting involved in a fraud or a legitimate program.

Are you required to start up with a large investment upfront? As the opposite to pyramid schemes, legitimate MLM businesses do not require large initial investments. Referral programs offered by established businesses do not require any additional investments at all, apart from the subscription fees (sometimes) which members are already paying for their services not associated with attracting new customers.

Is the company well known and the market receives attention? MLMs and Referral Programs exist in established markets where the businesses are interested in consumer demand. If you see that the company does not take effort to increase its brand awareness and there is no demand market for the service, don’t sign up. Likewise, if the business does not share its investment strategies and keeps the sources of income in secret, run.

Is there more focus on recruitment than on selling the service or product? Pyramid schemes emphasize fast profits from signing new members up and obtaining their money. Multi-level marketing, and especially Referral Programs, give you bonuses and discounts for inviting new customers to use a valid service or buy a tangible product.

Don’t fall into fraudulent schemes, always double check the party you are investing your money into, and use common sense to understand where the promised profits are coming from. If the income you expect is generated only by the inflow of new members without any additional value delivered to them, think twice before you sign up. Remember, companies that already offer valuable services (such as media streaming by Netflix, ride shares by Uber, bank accounts by American Express) offer legitimate referral programs. By contrast, XYZ schemes that don’t create anything but a website to sign up, are most likely fraudulent pyramid schemes.

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