Selling one's product involves a lot more than making something good. A lot of the time it takes a good amount of research, marketing and advertising to get people into your business. This can be done in a variety of ways like newspaper, commercial, website ads. The most long-standing method of advertisement, though, has always been word of mouth.

Multi-Level Marketing

A multi level marketing system is one where the product is sold by paid volunteers essentially. People sign up to sell and they also are tasked with bringing in new members. When you refer someone to join with you, a small portion of their profit will go to you to incentivize you to refer more individuals.

The legal issues come in when a company is making more money from membership fees or otherwise profiting from the users more than they are getting from the product itself. Think about it - In order to pay you money, they would have to be making more money than they're paying you from the business. If most of the money is coming FROM individuals, then even if you made a profit there has to be a net loss. Meaning some people being referred (usually the ones at the "bottom" of the pyramid) are not making a profit, they have lost money.

In other words these people who were invited to make money and told they can "run their own business" essentially, are instead just paying for a product that they won't be able to sell. That's how pyramid schemes make money from people. 

Ponzi Schemes

Another term often used and confused with pyramid is a "ponzi" scheme. A pyramid scheme is built around promising users rewards for referring new members. A ponzi scheme is specifically when people are asked to pay an entry fee or investment, and the founder(s) take a cut of the investment then split the rest to investors who came before this one.

This is also an unsustainable business model and bound to failure and losses for the majority of people. Ponzi schemes are often combined with multi-level marketing campaigns to drum up further business and keep the lie going as long as possible. The problem is when investors realize there is no product being sold and no real company to invest in and try to pull money out, the company will not have any basis to make more money or pay these people back.

The company has no real assets and no real business, it's just a bunch of recruitment for the sake of recruitment. 

Responsibility

When a friend suggests something to you, there's an element of trust there. You can assume that your friend has tried this thing and liked it, so why wouldn't you like it? It's a good way of advertising to ask your users to share with their loved ones. However this can unfortunately be exploited. Many times, you are asked to share a referral link for example to earn rewards or it might unlock perks on the website. 

Be careful what you share. When you tell your friends to join something you are opening them up to risks of the website being a scam etc.