What is a Pyramid Scam?

Pyramid scams have lots of names; after all, most adults know that Pyramid businesses are illegal and can land you in the pokey making license plates and wearing baggy orange jumpsuits. And so they give them names such as "referral marketing", "binary compensation" or "matrix marketing" and hope that the next person talked into joining the get-rich-quick company won't be smart enough to figure out what it really is...a plain old pyramid scam.

Before we go any farther, let's talk about the difference between a Pyramid and a Ponzi. A pyramid bases participants' income on convincing other people to join, rewarding each person according to how many people are underneath - hence the name "pyramid." A Ponzi, on the other hand, just shuffles money, paying off the earlier investors with money that comes in from the later investors.

Jack Pyramid will represent that YOU can recoup your initial investment by talking two people into joining underneath you, each investing the same amount that you did. Let's do the math here. You invest $1,000. Your two gullible friends then invest $1,000 each. Hmmm...seems to be an extra thousand left over, doesn't there? Who gets that? Jack does, sharing it with those above him in the pyramid. As each lower layer tries to recoup its own investment by doubling its size, Jack gets more and more money for less and less work. Some companies throw a product into the equation; they actually market something. Of course there are start-up kits, etc., and you must "spend money" to get-rich-quick. Product pyramid companies may be solely using the fact that they are selling something, as a method to avoid prosecution, if the product they sell is a ruse or has no real buying public.

Still, if it looks like a pyramid, feels like a pyramid and smells like a pyramid, well, you know what they say...

Pyramids come in all shapes and sizes. They may be investment organizations, buying clubs, distributorships, chain letters, mail order sales, door-to-door sales, or even games. No matter the actual vehicle, the real profit is earned by enrolling people, not by selling product. (One test is to find out if it is an uninvolved consumer buying the product, or if it is only selling to the newest "distributors.") One of the reasons the product will not and can not be sold in any volume to "real" buyers is because it is vastly overpriced. How else can they pay an unlimited amount of "up-line" people? Also, watch out for advertising that uses words like "miraculous new product."

Note: There ARE multi-level marketing companies that DO stress product sales above all else. And while you can earn extra by recruiting people, the products are real and there is an active buying consumer base. Examples of this are Amway and Avon.

Think about a "Chain Letter" started by six friends. They put their six names onto the list and each send it out to six of their other friends. Allegedly they send a dollar to the person at the top of the list. Their letter instructs the receiver to do likewise, then take that name off, move all the others names up one notch, add their name to the bottom and send it out to six more people. If every single person stays involved, the 6th person on that original list could conceivably receive $46.656 envelopes, each containing a dollar. Because the schemes always involve victims when the "dupes" run out, they are illegal. Participate and you could be subject to fines, arrested, or both.

Report Pyramid Scams to the FDC or your State Attorney General's Office.

Fight Fraud America!