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What is a Ponzi scheme and how does it differ from lawful models?

From time to time, a pyramid scheme or Ponzi scheme will make the news in Indianapolis. Operating a pyramid scheme or a Ponzi scheme is a violation of Indiana law. If a person is proved in court to have operated a pyramid or Ponzi scheme, they could be sued in civil court and may face high levels of civil damages and penalties. Depending on the circumstances, they could even be accused of white collar crimes and may face fines, restitution and prison time if convicted.

In Indiana, an illegal pyramid scheme occurs if person operates a program in which participants pay over $100 to enter, are encouraged to recruit others to join the program and are compensated from the fees the recruits pay to join. These schemes usually ultimately fail even if they appear to be successful at first. People often lose large sums of money, sometimes even their life savings, in pyramid schemes. This is why Indiana law punishes pyramid and Ponzi schemes so harshly.

One problem that legitimate business people may face is that a perfectly legal business model called a multi-level marketing business may be mistaken for a pyramid or Ponzi scheme. An MLM business is different from a pyramid or Ponzi scheme in that participants are selling actual products such as cosmetics or kitchen implements. Because participants are paying money in exchange for legitimate, salable products - instead of merely the right to collect from others who may not exist - MLM businesses are not considered pyramid or Ponzi schemes and are not illegal.

What if a disgruntled party accuses an MLM business operator of operating a pyramid or Ponzi scheme? It may be a great idea to have a legal advocate who can clearly draw the distinction between these dramatically different business arrangements.

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