A pyramid scheme is a fake system of making money established on the basis of recruiting an ever-increasing number of “investors.” The initial promoters enlist investors, who in turn enlist more investors, and so on. The scheme is referred to as a “pyramid” because the number of investors increases with each level. The small group of initial promoters at the apex needs a large base of later investors to support the scheme by providing profits to the initial investors.

Pyramid schemes might or might not entail the sale of products or the distributorships. The trend is to require sales of products or distributorships to strive in showing legitimacy. This is done completely to avoid the regulatory agencies, as most state laws restrict marketing practices where the potential for profit stems primarily from enlisting other investors and not from the sale of products. The bottom line, however, is that in every pyramid scheme, selling a product is far less important than recruiting new investors.

How Pyramid Schemes Operate

As its name suggests, the scheme has the design of a pyramid. It starts with one individual—the original headhunter, is at the apex of the hierarchy. The individual recruits one person, who has to invest a certain amount. The upfront payment is then paid to the original employer. For the newcomer to recover his investment, he or she must hire more members under him, each of whom will also make an upfront investment.

If the trainee manages to get 10 or more people to join, he would’ve earned a significant amount of profit from just a small investment.

Every  newcomer must get more people to join. He or she gains a substantial profit, minus the initial payment he made to the recruiter for every 10 people that an individual hires.

The recruitment continues till the scheme cannot sustain itself. During these times, those at the bottom lost their investment while those at the apex of the pyramid made huge profits.

The issue is that such a scheme cannot survive for a long time. There are only a limited number of individuals who can engage. Members are misled into thinking that by investing, they will earn a lot of profit. However, in reality, the scheme has not created any wealth naturally, nor have the scheme’s organizers purchased any assets.

Types of Pyramid schemes

Multi-Level Marketing Pyramid Scheme

Multi-level marketing (MLM) is a legitimate business program. This business model entails the sale of genuine goods or services by distributors or participants in the MLM. Distributors get compensated for the MLM products and services that they sell. They can also earn income from sales made by distributors that they’ve hired and from people those recruits then bring in.

However, some pyramid schemes conceal themselves as MLMs. The Federal Trade Commission warns people to notice, and evade, MLM promoters who:

• Make exceptional claims about your enormous earning potential.
• Try to coax people that enrolling others is where the real money lies.
• Pressure people to enter without learning more about the company.
• Make it clear that an opportunity will be lost unless people join instantly.
• Another warning sign is existing distributors who continue to purchase products that they cannot sell so that they can qualify for some kind of prize.

Chain Emails

Chain emails get naive recipients to donate money to everyone enlisted in an email. After making their contributions, donors are invited to delete the first name on the list and replace it with their own.

They’re informed to forward the email on to their own lists of contacts in the hopes that one or more of them will send them money. In theory, recipients can continue to collect donations until their names are removed from the list.

Ponzi Schemes

Ponzi schemes are investment scams that operate by robbing Peter to pay Paul. They may not necessarily follow a pyramid scheme’s hierarchical structure, but they do guarantee high returns to existing investors.

Ponzi schemes typically consist of a single, initial investment from investors. The investors must then wait for the promised return on their investment. That is offered by new money from other investors lured to take part by the leader of the scheme. When the money for this form of scheme dries up, most Ponzi scheme participants lose everything.

The most notorious Ponzi scheme artist, investment advisor Bernard Madoff, was sentenced to 150 years in prison for running a multibillion-dollar Ponzi scheme.

Madoff enticed many high-profile individuals to invest with him, falsified portfolios and appropriate paperwork, and paid off early investors with money received from later investors. The majority of investors lost everything. Madoff died in jail on April 14, 2021.

How Pyramid Schemes Fail?

As long as new, paying participants continue to buy in, pyramid schemes are feasible. The pyramid base must continue to increase Liv International business model. The whole structure disintegrates when the pool of accessible and willing participants disappears.

It’s impossible for pyramid schemes to operate in the long run. People will lose their money every time. Even high-level early participants may lose money near the end due to waiting periods that hold back payments from lower-level recruits.

How do Pyramid schemes succeed?

The success of pyramid schemes is normally limited to the founders and early-stage members. These people fraudulently entice new, fee-paying members longing to make the promised quick and large monetary return. These members then entail more fee-paying members. This cycle resumes. The income moves up to the founders and earlier members. The scheme usually dies down once no more fee-paying members can be found to help the existing members with their payments.

How Can You Avoid Being Swindled?

The easiest way to prevent being defrauded is obviously not to enter in any promotion that seems to be a pyramid scheme. The following are a few additional tips to help you avoid pyramid schemes:

• Collect all information regarding the company, its officers, and its products or services. Obtain written copies of the company’s marketing plan, sales literature, contracts, etc. Avoid promoters who fail to explain their plans in detail clearly. Read the company’s prospectus or other written material particularly. (A prospectus is a legal document that provides interested investors details about a company.) Get someone outside of the company to explain it to you if you don’t understand it.
• Find out if there is a need for the product or service.Is there a comparable product or service available? If so, how popular is it? Stay away if the promoters seem to be generating most of their money by selling distributorships or large start-up inventories to new trainees.
• Enquire if you must buy a product to become a distributor. Seek out if the company will buy your inventory or else, you may be trapped with unsold items. Sanctioned companies will buy back inventory for at least 80 to 90 percent of what you paid. Obtain written confirmation of all promises.
• Be wary if the startup costs are high. Some schemes demand you to pay a large amount to become a “distributor.” What are you gaining for your money? Beware of assurance of quick, easy, and unreasonably high profits.
• If the distributorship is giving a product for use in making a final product, make sure that whatever you offer reaches the final manufacturer. If you can, call or visit the manufacturer and demand for a list of its customers. Contact the customers and ask if they are satisfied with the products.
• Refrain from investing simply because the people selling you the program are friends or members of your religious or social organization. They may have been misled into thinking they could make a lot of money in a short period of time.

Conclusion

Pyramid schemes are illegal in many countries. The pyramid model of making money from a network of contacts frequently forces individuals to hire their family members, friends, and acquaintances. This can ultimately strain relationships. Such schemes should be ignored by investors.