Fraudsters frequently use a variety of channels to spread the word of pyramid schemes, including group presentations, YouTube videos, company websites, conference calls, social media, and online advertising. Promoters of pyramid schemes may go to great lengths to make the scheme appear legitimate multi-level marketing (MLM) program or another type of business. However, the scammers use the cash new hires provide to reimburse early-stage investors. The schemes eventually grow too large, the promoter cannot find enough new investors to cover the earlier investors’ payments, and the participants eventually lose their money.
Some of the characteristics of a pyramid scheme include any or all of these:
Pressure to sign-up
There is intense pressure to enroll immediately. Scammers frequently employ carefully written scripts intended to make you lose your guard and become enthusiastic about the business. Before investing, do your research and ask a lot of questions. A good chance to invest in a trustworthy company will not vanish overnight.
A focus on recruitment
A program is probably a pyramid scheme if its sole goal is to entice people to pay a fee to join it. Instead of through the sale of goods to the general public, you primarily make money based on the number of people you recruit and the fees they pay to join. Be doubtful if you are told that recruiting new people will pay you more than selling products.
No real goods or services are offered for sale
Be careful if the business sells items that are difficult to value, such as goods like widely distributed e-books, so-called “tech” services, or online advertising on inactive websites. Some scammers select elaborate-sounding “products” to make it more difficult to demonstrate that the business is a fake pyramid scheme.
Promises of substantial returns in a short time
Be wary of promises of quick money because they may indicate that commissions are being paid with funds from new hires rather than with money from product sales.
Passive income or easy money
You might be a victim of an illegal pyramid scheme if you are offered payment in exchange for performing menial tasks like paying bills, recruiting others, or posting online advertisements on obscure websites.
Buy-ins and forced spending
When most of the products are sold to other distributors as opposed to the general public, you have to “buy in” to the business or spend money attending seminars or purchasing sales materials.
No evidence of retail sales revenue
Legitimate MLM businesses generally make more money from product sales than from member recruitment. However, in a pyramid scheme, CPA-audited financial statements that demonstrate the company makes money by offering its goods or services to customers outside the program’s scope are nonexistent.
An intricate commission structure
Be wary unless commissions are determined by the goods or services you or your recruits sell to clients outside the program’s scope. Be careful if you are unsure of how you will be paid.
Types of Schemes
Pyramid schemes are of many kinds. While simple schemes and MLMs are most common, others may also be masquerading as genuine schemes. Here are the common types of pyramid schemes:
The eight-ball, also known as the airplane game, is an unsustainable pyramid scheme with only a set number of participants. In contrast to other intricate and complicated models, this one only requires a small number of players. The scheme involves exchanging money with those who sign up for the pyramid and is used in financial and non-financial institutions to add value to the organization on both a social and a financial level. It is intended to depict some tactful business practices, such as setting up a trading system and other routines. However, in reality, no actual goods or services are traded, making the model illegal in most countries.
Multi-Level Marketing (MLM)
Multi-Level Marketing, commonly known as MLM, is an authorized form of business operation. Distributors or MLM participants sell actual goods or services using this business model and are then compensated for the MLM products and services they sell. Additionally, they may be compensated for sales made by distributors they have recruited and the individuals those recruits later refer.
However, some MLM-impersonating pyramid schemes exist. The Federal Trade Commission advises consumers to be aware of and stay away from MLM promoters who:
- make bold claims about your enormous earning potential.
- try to convince people that the real money is in recruiting others;
- compel participation without providing sufficient information about the organization; and
- make it clear that if people do not act right away, a chance will pass them by.
In many instances, existing distributors who continue to purchase goods they will never sell to be eligible for rewards is another red flag.
Investment frauds, known as Ponzi schemes, operate by robbing one to pay the other (like the proverbial robbing Peter to pay Paul). They may not always follow the hierarchical structure of a pyramid scheme, but they do assure current investors of high returns. Ponzi schemes frequently only require an initial, one-time investment from investors. These investors are then paid their promised investment return, funded by fresh capital raised from additional investors the scheme’s organizer successfully recruited. When funding for these types of schemes runs out, the majority of participants in Ponzi schemes lose everything.
Matrix schemes are a type of pyramid scheme business model that is unsustainable. A person must pay a certain amount of money to enroll in such a system, after which their names are added to a waiting list. If a specific number of people sign up for this list, the person whose name is at the top should receive the desired result. When a new member joins, their name is added to the bottom of the list and moves up as more people sign up. Each new member adds a level, extending the pyramid scheme’s vertical reach. The desired result is typically an expensive good like electronics, travel, or even cars.
How Does Pyramid Schemes Differ From MLM Companies
Pyramid schemes and Multi-Level Marketing are not the same. MLMs are legitimate, lawful companies, and their distributors make money by selling actual products and receiving commissions on goods sold by distributors they have recruited. Pyramid schemes occasionally pass for MLMs, though, in an effort to draw in potential MLM recruits.
In a typical pyramid scheme, new investors or recruits must pay a fee in exchange for the right to sell the goods or services and the ability to entice new members into the scheme in exchange for benefits unrelated to the sales of goods or services. The promoters of the pyramid scheme frequently refuse to repurchase the unsalable goods or services the victim must purchase. On the other hand, reputable multi-level marketing businesses will buy back unsold goods, though frequently at a reduced cost.