What are Pyramid Schemes and How Do They Work?
A pyramid scheme is a type of investment scam in which each person involved recruits others to join. Money made by the new members funnels up to the higher members. The scheme relies on an ever-increasing number of people to sustain itself.
Most countries, including the United States, consider pyramid schemes as illegal and a form of fraud.
Pyramid schemes require members to pay an upfront fee, which may be labeled as a “membership fee,” “start-up cost,” or something similar, to join the scheme.
Once a member joins, the scheme encourages them to recruit others to join, often promising them a commission or other financial reward as an incentive.
Consequently, as more and more people join, the pyramid grows and the creators of the scheme make money.
Pyramid schemes are not sustainable and eventually collapse, leaving the majority of members out of pocket.
This is because, as the scheme progresses, there is a limited number of people that can be recruited, and eventually the pyramid will become too large to continue recruiting new members.
As a result, when this happens, the scheme collapses and the creators of the pyramid scheme make off with the majority of the money, while the members at the bottom of the pyramid lose their investments.
Tell-Tale Signs of a Pyramid Scheme
Scammers often disguise pyramid schemes as legitimate business opportunities, making it difficult to identify them.
Tell-tale signs that you may be dealing with a pyramid scheme:
- Promise high returns with little or no risk to lure in new investors. Be wary of any investment opportunity that seems too good to be true.
- Ask members to recruit others to join to make money. If you are being asked to recruit others to join an investment opportunity, it’s a red flag.
- Focus on recruiting, not the product or service.
- Require members to pay upfront fees to join or “invest” in the opportunity. These fees may be called “membership fees,” “start-up costs,” or something similar.
- Make it difficult to find information about the company. If you can’t find basic information about the company or its ownership, it’s a red flag. A legitimate business should be transparent about its operations and should be willing to provide information about its ownership and management.
Our investigations into Common Scams of 2023
Notable Examples of Pyramid Schemes
There have been many notable examples of pyramid schemes throughout history. Here are a few examples:
Bernie Madoff’s Ponzi scheme: In 2009, Bernie Madoff was sentenced to 150 years in prison for running a Ponzi scheme that defrauded investors out of billions of dollars. Madoff’s scheme was one of the largest and most infamous pyramid schemes in history.
OneCoin: OneCoin was a cryptocurrency pyramid scheme that defrauded investors out of billions of dollars. The scheme was marketed as a legitimate investment opportunity but was in fact a fraudulent scheme that collapsed in 2016.
TelexFree: TelexFree was a pyramid scheme that operated as a multi-level marketing company. The scheme defrauded investors out of hundreds of millions of dollars before it collapsed in 2014.
Herbalife: Herbalife is a multi-level marketing company that has been accused of operating as a pyramid scheme. The company has faced multiple lawsuits and regulatory investigations, with critics alleging that it focuses more on recruitment than on selling its products.
Amway: Amway is a multi-level marketing company that has also been accused of operating as a pyramid scheme. The company has faced numerous lawsuits and regulatory investigations, with critics alleging that it focuses more on recruitment than on selling its products.
How to Avoid Pyramid Schemes
To avoid falling victim to a pyramid scheme, it’s important to be cautious and do your research before investing in any opportunity. Here are a few tips to help you avoid pyramid schemes:
- Be wary of promises of high returns with little or no risk.
- Avoid investment opportunities that require you to recruit others to join.
- Research the company and its management before investing.
- Avoid paying upfront fees to join an investment opportunity.
- Before joining, seek out the advice of a financial professional or consult with the appropriate regulatory authorities.
If you suspect that you may be dealing with a pyramid scheme, it’s important to report it to the appropriate authorities and seek out reliable sources of information before making any decisions. Protecting yourself from pyramid schemes and other types of investment fraud is essential for preserving your financial well-being.
Pyramid Scam Blacklist
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