Pyramid Scheme

These types of pyramid schemes have existed for at least a century. There are other commercial models using cross-selling such as multi-level marketing (MLM) or party planning which are legal and sustainable, although there is a significant grey area in many cases. Most pyramid schemes take advantage of confusion between genuine businesses and complicated but convincing moneymaking scams.

The essential idea behind each pyramid scheme is that the individual makes only one payment, but is promised to somehow receive exponential benefits from other people as a reward. A common example might be an offer that, for a fee, allows the victim to sell the same offer to other people, or receive bonuses through other people they refer. Each sale includes a fee to the original seller.

Clearly, the flaw is that there is no end benefit; the money simply travels up the chain, and only the originator (or at best a very few) wins in swindling his followers. Of course, the people in the worst situation are the ones at the bottom of the pyramid scheme: those who subscribed to the plan, but were not able to recruit any followers themselves. To embellish the act, most such scams will have fake referrals, testimonials, and information.

In 2003, an internet-based "pyramid scheme" was uncovered by the United States Federal Trade Commission (FTC), where customers would pay a registration fee to join a program and purchase a package which included Internet mall and related goods and services. The FTC's complaint states that the company assured consumers who purchased the package would allow them to earn significant commissions for every Web Suite sold.

The FTC alleged that the company deceptively represented that consumers who participated in their scheme would earn substantial income, when in fact most consumers lost money in the operation, and that the defendants provided deceptive marketing material to affiliates - providing them with the means to deceive others; and finally, the company failed to disclose that a substantial percentage of participants would lose money, and that the scheme was actually an illegal pyramid scheme.

The distinguishing feature of these pyramid schemes is the fact that the product being sold has little to no intrinsic value of its own or is sold at a price out of line with its fair market value. Examples include "products" such as brochures, cassette tapes or systems which merely explain to the purchaser how to enroll new members, or the purchasing of name and address lists of future prospects.

The costs for these "products" can range up into the hundreds or thousands of dollars. A common Internet pyramid scheme involves the sale of documents entitled "How to make $1 million on the Internet" and the like. The result is that only a person enrolled in the pyramid scheme would buy it and the only way to make money is to recruit more and more people below that person also paying more than they should.

This extra amount paid for the product is then used to fund the pyramid scheme. In effect, the scheme ends up paying for new recruits through their overpriced purchases rather than an initial "signup" fee.

An income stream that chiefly depends on the commissions earned by enrolling new members or the purchase by members of products for their own use rather than sales to customers who are not participants in the pyramid scheme. A tendency for only the early investors/joiners to make any real income.

Assurances that it is perfectly legal to participate.
The key distinction between these pyramid schemes and legitimate MLM businesses is that in the latter cases a meaningful income can be earned solely from the sales of the associated product or service to customers who are not themselves enrolled in the scheme.

While some of these MLM businesses also offer commissions from recruiting new members, this is not essential to successful operation of the business by any individual member. Nor does the absence of payment for recruiting mean that an MLM is not a cover for a pyramid scheme.