What is a pyramid scheme?
Pyramid selling is a fraud. It is a mechanism by which promoters of so-called “investment” or “trading” schemes enrich themselves in a geometric progression through the payments made by recruits to join the schemes. The products, if any, associated with pyramid schemes are typically not resalable to consumers for prices at or above those charged by the companies and are typically sham products used to disguise high, required up front payments to join the scheme. Some other terms used in various international jurisdictions for the same or similar unlawful schemes are “chain letters,” “snow balls,” “chain selling,” “money games,” “referral selling,” and “investment lotteries.”
Things you should know about pyramid schemes
- They are losers. Pyramiding is based on simple mathematics: many losers pay a few winners.
- They are fraudulent. Participants in a pyramid scheme are, consciously or unconsciously, deceiving those they recruit. Few would pay to join if the diminishing odds of success were explained to them.
- They are illegal. There is a real risk that a pyramid operation will be closed down by the officials and the participants subject to fines and possible arrest.
Why would anyone pay to join a pyramid scheme?
Pyramid promoters are masters of group psychology. At recruiting meetings they create a frenzied, enthusiastic atmosphere where group pressure and promises of easy money play upon people’s greed and fear of missing a good deal. Thoughtful consideration and questioning are discouraged. It is difficult to resist this kind of appeal unless you recognize that the scheme is rigged against you.
How to Protect Yourself
- Take your time. Don’t let anyone rush you. A good opportunity to build a business in a multilevel structure will not disappear overnight. People who say “get in on the ground floor” are implying that people joining later will be left out in the cold. BEWARE!
- Ask questions About the Company and its officers:
- About the products – their cost, fair market value, source of supply, and potential market in your area.
- About the start up fee (including required purchases).
- About the company’s guaranteed buy-back of required purchases.
- About the average earnings of active distributors at various levels in the compensation program.
- Get written copies of all available company literature.
- Consult with others who have had experience with the company and its products. Check to see if the products are actually being sold to consumers.
- Investigate and verify all information. Do not assume that official looking documents are either accurate or complete.
- Check with various consumer protection groups to make sure the company has a satisfactory history of complaint resolution. Please refer to the US Direct Selling Education Foundation’s pyramid scheme brochurefor more infromation on pyramid schemes.