Avoid being a victim of scam (Part 2)

According to the Department of Trade & Industry (DTI) material “Don’t Be a Victim of a Scam”, after learning about the entity that is trying to present a business scheme or marketing plan and/or enticing you to invest, the more important question now is: how do I know if the scheme is legitimate? Well, the answer is: it depends.

Let's start with the classic Ponzi schemes. A Ponzi scheme is generally characterized as taking money from future investors to payoff old ones.  Such a characterization does not necessarily describe an illegal activity, per se.  Per same DTI publication, it states that corporations commonly raise money to pay off existing debts or to buy shares from existing shareholders - this is particularly common when a new company "goes public" with an initial public offerings of securities. The key to determining whether the scheme is a Ponzi scheme or a legitimate capital raising activity is that all aspects of the scheme must be fully disclosed to you, the prospective investor.  The promoter of a Ponzi scheme is really trying to cheat you; he will never give you truthful and complete disclosure.  He knows that if he gave you the information that your money would be used to pay off existing investors, you would not invest your money in the scheme.

How about multi-level schemes?  Here, the answer is not as easy. Remember that these schemes are sometimes used by legitimate companies to sell their products or services to the public.  As long as the main focus of the scheme is the sale of these products or services, then the multi-level marketing scheme is legitimate. So, how can you tell if the main focus of the scheme is the sale of products or services? 

First, in this case you will not be offered unbelievably high earnings without effort.  If your earnings depend on the number of recruits you bring into the business, the focus of the scheme begins to shift away from the sale of products and services.  One needs to remember that no matter how good a product is and how solid a multi-level marketing plan may sound, one must expect an effort or what we commonly call – “sweat equity”, apart from the amount of money needed to be invested for the plan to pay off.

Secondly, the amount of money you have to invest into a legitimate arrangement is generally either nothing or a small amount that is used to pay for an initial purchase of products to be sold.  Be wary, however, if the amount of your initial investment is much greater than the value of the product.  This could be a pyramid in disguise.  And lastly, in a legitimate scheme, your earnings are related to your performance as a salesman of the products or services being marketed.  As discussed, if these earnings are based on your recruiting activities, the scheme is more likely to be a pyramid scheme.

Again, beware of signing contracts in an "opportunity meeting" or other “high pressure” situation without doing due diligence.  Take your time and consult others, especially persons in authority and/or government agencies before deciding or investing. My advice, always ask the right questions, vigilance in obtaining more information and making due diligence every step of the way are very important qualities to avoid being a victim of scam.

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