How to Prevent Pyramid Scheme Scams?

A pyramid scheme is a scam where people are tricked into thinking they will make a lot of money. At first, the people who join early do get paid, which makes them tell others to join. The money to pay them comes from new people joining. But eventually, no more new people join, and the scheme falls apart.

What is a Pyramid Scheme?

• Fake Investment Pitch: Pyramid schemes promise big returns from fake investments.
• Relies on Recruitment: Early investors get paid with money from new investors, not from real business.
• Won’t Last: When no new investors join, the scheme collapses.

How Does a Pyramid Scheme Work?

• Structure: Looks like a pyramid with one person at the top recruiting others below.
• Fees for Joining: New members pay fees that go to the recruiters above them.
• No Real Product: Often, there are no real goods or services, just fees from new recruits.

Key Characteristics

• Illegal in the U.S.: Joining a pyramid scheme is a crime.
• Focus on Recruitment: Money comes from fees, not from selling products.
• Different from MLMs: Real MLMs sell products. Pyramid schemes only focus on recruitment fees.

How Pyramid Schemes Operate?

Pyramid schemes are called that because their payment structure looks like a pyramid. The scheme starts with one person at the top and gets wider at the bottom as more people join. Each level recruits more people below them.

Recruitment and Payment Cycles

• First Recruitment: The founder gets people to join with promises of high returns.
• Flow of Fees: Each new member pays fees, with some money going up the pyramid.
• Ongoing Cycle: The cycle continues as long as new people join and pay fees.

Practical Outcomes

• Fake Gains: Early members might get returns, making it look successful.
• Inevitable Collapse: When no more people join, the scheme fails, and most lose money.

Identifying Pyramid Schemes

• SEC Warning Signs:
  • No real product or service.
  • Promises of quick, high returns.
  • Focus on recruiting, not selling products.
  • Complicated commission plans.
  • High entry fees.

Types of Pyramid Schemes

Multi-level marketing (MLM) is a legal business plan. In this model, people sell real products or services. Distributors earn money by selling these products and services. They also get paid for the sales made by the people they recruit and the sales made by those recruits.

MLM Pyramid Schemes

• Real MLMs: Sell real products and pay for sales.
• Fake MLMs: Pretend to be MLMs but focus on recruitment.
• Red Flags:
  • Huge earnings claims.
  • Pressure to recruit.
  • Urgent to join now.

Chain Emails

• Donation Scam: Ask for donations, hoping others will do the same for you.
• False Promises: Stops working when people stop donating.

Ponzi Schemes

• Investment Scams: Promise high returns using new investors’ money to pay earlier ones.
• Example – Bernard Madoff: Ran a huge Ponzi scheme, causing massive losses.

Real-Life Example: CKB

• SEC Charges: The SEC charged CKB, which pretended to sell courses but relied on recruitment fees.
• Misleading: CKB made money from new recruits, not from selling products.

How Pyramid Schemes Collapse

Pyramid schemes always fail because they need more and more people to join. Since there aren’t enough people in a community, these schemes will eventually fall apart. Only a few people at the top make money.

Dependence on New Recruits

• Need for Growth: The pyramid needs more and more people to join.
• Inevitable Failure: When new recruits stop joining, the scheme collapses.

Legal Consequences

• Crime: Participating in pyramid schemes can lead to jail and fines.
• Few Winners: Only the founders and early members might profit, most lose money.

Preventing Pyramid Scheme Scams

Gather all information about the company, its leaders, and its products or services. Get written copies of the company’s marketing plan, sales materials, and contracts. Avoid promoters who do not clearly and fully explain their plans.

Recognizing Legitimate MLMs

• Focus on Products: Real MLMs sell tangible products.
• Income from Sales: Earnings come from selling products, not recruitment.
• Clear Commission Plans: Commissions are based on sales, not recruiting.

Avoiding Scams

1. Research the Company: Learn about its products, leaders, and marketing.
2. Check Product Demand: Make sure there is a real market for the product.
3. Buy-Back Policy: See if the company buys back unsold products.
4. Watch Out for High Fees: Avoid schemes that require high fees to join.
5. Verify Legitimacy: Check with regulatory agencies to see if the company is legitimate.

Legal Protections

• Contact Authorities: Reach out to the New York State Attorney General, the Federal Trade Commission, or the Better Business Bureau for help.

Conclusion

Pyramid schemes are scams that eventually lead to financial losses. Knowing the signs and understanding the difference between real MLMs and pyramid schemes can help you avoid these scams. Always research and verify any investment opportunity before spending your time and money.

If You’re a Person who frequently buys something from an Online store. Make sure You Know How to Avoid Shopping Scams.