Pyramid schemes are illegal investment scams that take a hierarchical structure-like model. New recruits constitute the base of the Pyramid and provide the required funding. The so-called returns are given to the initial investor (recruits above them). Some of these schemes operate as Multi-Level Marketing companies.
What is all about?
In the classic pyramid schemes, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the fake promise of sky-high returns in a very short period, just by doing nothing other than giving out your money and getting others do the same.
How the Pyramids Work
Pyramid schemes have severely cost many people their hard-earned money. The concept behind them is simple; however, they are often presented to the investors in a disguised form. This is the reason it is quite important to be familiar with how the pyramid schemes work, and the different shapes and sizes they take.
As the name indicates, the pyramid scheme is structured in the form of a pyramid. It basically starts with one person – the leading recruiter, who is on top at the pyramid apex. This person then recruits a second person, who is required to “invest” a certain amount, which is paid to the first recruiter.
To make his money, this new recruiter must recruit more people under him/her, and each of these new recruits will have to invest. If the recruit gets 10 more people to invest, he or she will make an actual profit based on the investment.
The chain continues and the new people become recruiters, and each is required to recruit 10 more, to make a profit, resulting in a total of 100 more people. Each of these recruits is also supposed to pay their investment to the person who recruited him or her.
Here, recruiters get a profit of all the money they received, less their initial investment paid to the person who recruited them. The chain continues until the pyramid base is not strong enough to support the upper structure, after reaching a time where there are no more recruits, the pyramid then collapses.
How are pyramid schemes scams?
The project is typically initiated by a company or an individual who starts recruiting investors with the offer of absolute high returns. From the first day the scam is initiated, its liabilities normally exceed the assets. Therefore, the only one way the scam can generate the required wealth is by promising faked extraordinary returns to the new recruits. Additionally, the only true way the returns can be paid is through getting additional investors since money collected is not invested in any other fast profit generating venture. Invariably, these scams lose base leading to collapse of the pyramid.
Some Famous Pyramid Schemes
(i) The Ponzi scheme
It is a fraudulent investment plan in which the money obtained is not invested at all. Instead, every new investment paid by a recruit is used to pay off an earlier investor.
(ii) Affinity schemes
These are schemes that target certain ethnic or religious groups, as the scammer presents himself as part of that group. People contribute as a way of “giving back” to the community, and that’s how they get scammed.
The Warning signs
– You are presented with a chance to join a scheme, group or program where you need to recruit new members to make money.
– The project entails providing goods or services of little or very theoretical value that serve only to promote the scheme.
– There are big up-front costs
– The promoter makes claims such as “This is not a pyramid scheme” or “This is absolutely legal”.
To protect yourself, do not let anyone pressure you into making decisions about investments. Be wary of schemes or products that claim a guaranteed income. Consider whether the rewards that you have need promised are dependent on the product sales. If so, consider if the products are of real value or not, and their price. It is against the state law not only to take part in any pyramid scheme but also to participate in one. STAY SAFE!!