A pyramid scheme is a process that involves promising new participants large profits in return for selling a product or promoting a new venture, meanwhile the actual goal – for the recruiter and the new enrollees – is to procure more and more members, therefore creating a pyramid of people who have been recruited and must, in turn, get others to join.
The Federal Trade Commission describes it as a scam in which people within the pyramid are more likely to profit off the purchases or payments each recruit is required to make than they are off the sale of the actual product or venture being sold.
“The promoters of a pyramid scheme may try to recruit you with pitches about what you’ll earn. They may say you can change your life – quit your job and even get rich – by selling the company’s products. That’s a lie,” according to the FTC. “Your income would be based mostly on how many people you recruit, not how much product you sell. Pyramid schemes are set up to encourage recruitment to keep a constant stream of new distributors – and their money – flowing into the business.”
According to the Securities and Exchange Commission, a tell-tale sign of a pyramid scheme is that there is little emphasis, if any, on the actual service or product purportedly being sold. The same goes for retail sales revenue. Instead, according to the SEC, the focus is on recruitment.
The agency warns: “All pyramid schemes eventually collapse, and most investors lose their money.”