The schemes “ask people to make an investment and, in return, grant them a license to recruit others who, in turn, recruit still others into the scheme. In essence, the investor pays for the opportunity to receive compensation when his or her recruit brings others into the scheme. The opportunity to recruit is the product”.
Pyramid schemes are similar to Ponzi schemes, which are another type of investment scam, because they both promise large returns on investments that are unachievable because they are solely derived from new investor funds.
Pyramid schemes are fraudulent businesses where participants are paid to recruit others to participate. The schemes are illegal because
(1) profits are derived primarily from recruiting people rather than from selling non-harmful products and services,
(2) recruits often pay large up-front fees for enrollment and sales kits, and
(3) recruits are pressured into stockpiling large quantities of non-returnable inventory.
Pyramid schemes differ from multi-level marketing (MLM) in that MLM involves commercially viable products (e.g., jewelry, clothing, health products), which have real income earning potential through repeat sales to clients.
Pyramid Schemes are often broken into two categories:
*Product based Pyramid schemes: Participating persons not only contribute funds to a person(s) identified at the top of the pyramid but are also encouraged to sell products associated with the person(s) at the top of the scheme.
*Non-product based Pyramid schemes: Participants contribute funds only to a person(s) identified at the top of the pyramid, with no products being sold. These schemes constantly require new members for profits to be realized.
Pyramid scheme
