A “pyramid scheme” is a program that pays the distributor a commission solely for bringing in other distributors. The new recruits money is used to pay the people above them in the pyramid, which eventually collapses when it grows too big.  According to the Federal Trade Commission, state laws against pyramiding say that a multilevel marketing plan should only pay commissions for retail sales of goods or services, not for recruiting new distributors.

In other words, if a plan promises to pay you X amount for each new distributor you sign up, it may be an illegal pyramid scheme. However, if the plan gives you a X amount for each sale someone your refer makes, then the payout is totally legal and legitimate.

For more info on illegal pyramid schemes, visit the Federal Trade Commission’s website:
http://www.ftc.gov/bcp/conline/pubs/invest/mlm.htm