What is a pyramid scheme? A pyramid scheme, much like a Ponzi scheme, is a financial scam, often run by one person at the top, to convince as many investors as possible into supporting their business or service. Pyramid schemes promise investors that they’ll receive a portion of the scheme’s profits when they recruit new participants.
A pyramid scheme can look like a normal business, but this illegal con only rewards the person at the very top of the pyramid by charging new investors upfront. There are several ways to tell if you’ve been involved in a pyramid scheme:
1. Are there tons of upfront investments to be involved?
You may be asked to pay upfront costs to participate in a business model being sold to you. Pyramid schemes often promise a large revenue for investing in their business model. These investments likely are paid back to the person running the scheme and you likely won’t see the same profits.
2. Are you required to recruit new members to make a profit?
A pyramid scheme doesn’t work without new recruits. New participants at the bottom of the pyramid pay longtime investors, but if this scheme runs out of investors, then the pyramid crumbles.
3. Are unsold services covered by the business?
Some pyramid schemes run business models that provide goods to investors – often cheaply made products promised to do something special. Some of the upfront costs of a pyramid scheme may go directly into these goods. If you don’t sell these products and the scheme doesn’t pay you back, you may be out on your investments.
Pyramid schemes are sketchy business models that could cause fraud and money laundering problems. If you believe you’ve been advertising a pyramid scheme, then you may need to reach out for legal help.