People are always thinking up new ways to swindle others out of their hard-earned cash. Some of these schemes can take new and creative forms, but the pyramid scheme, which is still prevalent today, hasn’t changed much in over 200 years.
How a Pyramid Scheme Works
Pyramid schemes follow a predictable formula. Usually, one person, known as the “recruiter,” will create a fraudulent business which requires others to pay a fee to join. The people he recruits to the business then recruit others to join as well, and pocket the fees. This cycle of recruitment is supposed to continue indefinitely, so that everyone who joins the “business” will continue to receive the recruitment fees of the newest recruits. The problem with successful pyramids is that, eventually, there will be no one left to join the pyramid, and those already in the scheme will lose their investment.
Multi-Level Marketing Businesses Are Not Pyramid Schemes
Pyramid schemes are still popular today. Many reasonable people still fall for them because they sound so similar to a type of legitimate business model called multi-level marketing (MLM). An MLM business involves a central corporation that creates a product, and then convinces other people to pay a fee in exchange for the right to sell its product. Unlike a pyramid scheme, MLM businesses make their money by selling products such as cosmetics, cooking implements, and fashion accessories; they don’t rely on an unsustainable stream of new recruits to make their money.
How Pyramid Schemes are Prosecuted
There’s no single federal statute the US government can use to prosecute pyramid schemes. However, the Federal Trade Commission has occasionally prosecuted pyramid schemes as deceptive trade practices, or fraud. Additionally, each state has its own set of laws designed to combat pyramid schemes, such as this one from Texas. Many require the pyramid scheme promoters to pay fines, or spend time in prison if convicted.