Pyramid Scheme

A pyramid scheme is a business model that involves the exchange of money, primarily for enrolling other people into the scheme, often without any product or service being delivered. A pyramid scheme is designed to exploit greed and gullibility. A successful pyramid scheme combines a fake yet seemingly credible business with a simple-to-understand yet sophisticated-sounding money-making formula.

The success of a pyramid distributorship for each and every distributor depends on continuously getting additional people to join the pyramid. However, there is a practical limit to how many distributors can be found and to how many product units they can sell or use. The difference between MLM and pyramid schemes is that pyramid schemes do not offer a genuine product.

Fraudulent pyramid schemes typically violate the Lottery Statute (Title 18, United States Code, Section 1302). They contain all three elements of a lottery: prize (expectation of monetary or other gain from participation in the pyramid); chance (the monetary return you may receive from your participation is entirely up to chance, that is, dependent on the efforts of those below you in the pyramid), and consideration (the fee you pay to become a distributor). Frequently, the entrance fee into the pyramid is very high. In many cases, the money spent for such an entrance fee can often be considered lost the moment you pay.

To protect yourself against falling victim to a pyramid scheme, note whether the basis of the promotion is the sale of a product at the retail level, as opposed to an emphasis on recruiting more and more distributors to help you increase your income.

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