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Pyramid Scheme
In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants. The hallmark of these schemes is the promise of sky-high returns in a short period of time.
Pyramid scheme promoters may go to great lengths to make the program look like a multi-level marketing program selling legitimate products or services. But these fraudsters use money from new recruits to pay off early stage investors until eventually, the pyramid collapses. At some point, the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and people lose their money.
For more information, the Federal Trade Commission’s website has publications on Lotions and Potions: The Bottom Line About Multilevel Marketing Plans and Profits in Pyramid Schemes? Don’t Bank on It!
Ponzi and pyramid schemes are closely related. Here is how to tell them apart:
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Pyramid Scheme |
Ponzi Scheme |
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Typical “hook” |
Earn high profits by making one payment and finding a set number of others to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may only be “sold” within the pyramid scheme. |
Earn high investment returns with little or no risk by simply handing over your money; the investment typically does not exist. |
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Payments |
Must recruit new distributors to receive payments. |
No recruiting necessary to receive payments. |
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Interaction with original promoter |
Sometimes none. New participants may enter scheme at a different level. |
Promoter generally acts directly with all participants. |
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Source of payments |
From new participants – always disclosed. |
From new participants – never disclosed. |