Save yourself from becoming a victim of this trap. Read this article to find the answer to: why are pyramid schemes bad?
You know when specific plans or schemes are too good to be true? Well, pyramid schemes are one of them. It introduces itself as a blessing in disguise and promises a good amount of money. But behind all these promises is an elaborate scheme. Its roots are designed to deceive the unemployed and convince them of the fortune they might earn.
Pyramid schemes are illegal in many countries. The main focus of the whole plan is to acquire more profit by inviting more people to invest in the company. It is a scam that causes a lot of investors to face a loss.
There are many dimensions of pyramid schemes, and they continue to grow all over the world with great speed. To better understand pyramid schemes and why many people run after such plans.
What are pyramid schemes?
Before we find the answer as to why pyramid schemes are illegal or bad, we need to know what they actually are.
Pyramid schemes are usually defined as a business module that promises profit in a short period. People are recruited and expected to invest a fixed amount of money. However, that is not where this scheme ends. Those same people are expected to invite more people into the program. This creates a chain where numerous people enter the company and invest their money.
Pyramid schemes explained
Let us take a closer look at what pyramid schemes are.
Pyramid schemes are not like stable business ventures that focus on the customer. On the flip side, the focus is just on recruiting more and more people. The sold services or product intended for the customer is of little value.
As the name suggests, pyramid schemes earn their name due to their hierarchy system matching that of a pyramid’s structure. The person at the top recruits individuals, and the chain carries on till there is a base.
For instance, one person recruits or introduces ten people to a program. All they have to do is:
- Introduce the same amount of people and
- Invest a fixed amount of money into the business
This is a vicious cycle, and it continues to move on and on. The money received by each new employee is used to pay the original recruiters. This fraudulent system is prone to fail and those at the bottom of the pyramid suffer a considerable loss.
Many people use the term “sell products or services” in a pyramid scheme to make their business seem legitimate. However, products and services mean little to such scammers.
The main focus of a pyramid scheme is to recruit more people. It is not a consumer-friendly or orientated program. But a plan that focuses on earning more money and profit.
How do pyramid schemes work?
We all know what a pyramid looks like. It is a 3-dimensional triangle architectural building found in the desert. Like the structure, the pyramid scheme invites more people into a business.
The person who starts the scheme, or in other words, the boss, is at the tip of the pyramid. The original recruiter invites an investor into their business and asks them to pay upfront. It is similar to a joining fee of sorts. Once that money is invested, it goes directly into the bank of the person who initially invited the person.
But that is not where it stops. The pyramid part comes along when the investor is expected to bring in another recruiter, bringing in more investors. And then you end up with a pyramid. Each newly recruited individual has to pay a specific amount of money which goes to the original recruiter. Not only do they not lose their money, but they also have a chance to get more than before.
This scenario applies to one person. You might sometimes be asked to recruit 2,3,4, or even up to 10 investors. The more people you bring in, the more money you have in your pocket. This becomes a recurrent theme, and it soon starts to falter. Naturally, the initial recruiters earn more money than those who have just entered the scheme.
You ask those 10 investors to invest 100 dollars each, totaling $1,000. In order to give those investors their money back with more value, you ask each of them to recruit 10 more investors and collect from them $100. You will acquire $10,000. Continue this cycle, and more money enters your pocket.
Why are pyramid schemes bad?
Now that we know what they are, let us understand why they are a bad option. It is worth noting that pyramid schemes are illegal in many states and countries worldwide. This is because it is a fraudulent mechanism designed to deceive people.
Primarily, pyramid schemes are bad because of the amount of time and money wasted. It is a scam that promises to double your money in a short amount of time. If you aren’t really focusing on selling products, acquiring double the amount seems a bit fishy.
Other than that, pyramid schemes are born to fail. Let us take another example:
A person comes up to you with an enticing offer. You are expected to recruit 5 people with you and invest a fixed amount of money. The profit is double the money. The catch? Ask those 5 people to recruit 5 people as well. This chain follows. The money invested is used to pay those on top of the pyramid. Slowly and gradually, those at the bottom stop receiving money. This leads to a pyramid scheme.
Pyramid schemes are prone to fail because, at one point, the recruiters and investors are no longer paid the amount promised. Or not paid at all. Moreover, it depends on the number of people you recruit. Once that number goes out the window, no more people are paid. They suffer a considerable loss; the only benefactor is one person at the top of the pyramid.
These schemes do not last that long. You would want to invest in a business that promises growth in future. Pyramid schemes provide temporary money but end up forming a huge hole in your wallet.
Does a pyramid scheme make you rich?
We have understood what makes pyramid schemes bad and how they work. The inner workings of every pyramid scheme is similar. To answer this question, we can use the same example as above.
Original recruiters, those who either started the pyramid scheme or the initial investors, end up earning millions or even billions of dollars. We have listed some well-known examples and famous pyramid schemes below for reference. All those people who started this plan benefited from it and earned money that would support them and their future.
But it robs those at the end. Because these individuals are at the base of the pyramid, they are taken advantage of the most. Recruiters take money from new recruiters and pay the already existing ones. Those new recruiters are left with nothing.
So the answer is: Yes, pyramid schemes make you rich, but the chances of you suffering from a loss outweigh the pros. You are either penalized for it via jail time or have to endure a loss of money.
Examples of pyramid schemes
Many businesses can be used as pyramid scheme examples to help you understand how people are deceived into sending their money. They seem pretty good to hear at first. But with these examples, you will understand why pyramid schemes are illegal.
Big Co-op Inc.
A very famous and recent pyramid scheme was launched by Big Co-op Inc. Their plan was attractive, but their craft was faulty. This online scheme required people to purchase a proper license to sell products online. However, the inner work of this company was to ensure more people were being recruited and earning that license. At first, it seemed like a simple business: earning a license to sell a product. However, the fact that every person was required to submit monthly installments made this a Big pyramid scheme.
Wealth Pools
Like Big Co-op Inc., Wealth Pools created the image of them selling language learning DVDs to a global market. However, after proper investigation, it was found that Wealth Pools relies on how many recruiters an existing employee brought to the firm. The more recruiters were entering Wealth Pools, the more money you earned.
Wealth Pools is a clear pyramid scheme example that has scammed all those who people went through with their plan.
Common question: is Avon a pyramid scheme?
Because we are talking about pyramid schemes examples, a standard query of many is: is Avon a pyramid scheme?
The answer is no. As their business foundation, Avon used to employ Multi-level Marketing, which is discussed below. However, with time they have legitimized and become a great way to reach consumers.
Avon is a consumer-based company that focuses on making cosmetic-related sales. It is widely confused and associated with pyramid schemes due to its affiliation with Multi-level Marketing (MLM). However, they focus on and have sold more products.
Famous pyramid schemes
Some famous pyramid schemes come to light as we closely look at those who initiated them. These names are notoriously known for their Ponzi scheme that robbed thousands of people. Read along to find out more about these four.
Lou Pearlman
Lou earned almost 300 million dollars due to his scheme, one of the top figures of the pyramid scheme. This man acquired or instead stole money from many investors in his pyramid scheme. He convinced these investors to invest more than $300 in a company that did not exist.
Scott Rothstein
The pyramid scheme introduced by Scott earned him $1.2 billion. Yes, $1.2 billion. Not a small amount. He created a law firm and invited numerous investors, gushing over the firm’s credibility. These investors bought numerous settlements, earning them a huge loss and giving Scott a whopping $1.2 billion.
Bernie Madoff
The largest pyramid scheme to date was organized by Bernie Madoff. Bernie convinced numerous investors to invest in the company’s funds and earned as a result: $20 billion. Putting Scott’s $1.2 billion to shame, Bernies seemed to have made a record of his own.
Charles Ponzi
The term Ponzi comes from the name stated above, Charles Ponzi. Charles Ponzi was perhaps the pioneer and introduced pyramid scheming. He is infamously known as the man who created the notion of taking money from new recruiters and paying back the old ones. Although he earned $15 million in his scam, which is nothing compared to Bernie, Ponzi still made his name.
Punishment for pyramid schemes
Because pyramid schemes deceive people through their fraudulent system, it is considered a grave felony. Those caught promoting this sort of business venture are ultimately given a punishment by the state.
The people at the top of the pyramid scheme, especially the original recruiter, are punished and sent to jail. The minimum number of jail time pyramid schemers are expected to spend four years. But as we have seen in the case of Bernie Madoff or Scott Rothstein, the punishment can lead to 150 years and 50 years, respectively. It initially depends on the amount of money the original recruiter or the grand planner has acquired. Other than jail time, those guilty of participating in this crime are expected to pay up to $50,000. In some cases, both jail time and a penalty become mandatory.
A civil lawyer is usually hired to sue or fight those participating in and promoting just pyramid schemes. Though you may find that acquiring money through this scheme is profitable and easy, you have to be aware of the repercussions that will eventually follow. Pyramid schemes always fail and end tragically. And when they do, you are held accountable for a crime and have to pay due with a punishment that will eventually adversely affect your future.
Types of pyramid schemes
Where pyramid schemes basically recruit new employees or investors to pay old investors, there are many different types of pyramid schemes.
Let’s take a look at them.
Multi-level Marketing
The Multi-level Marketing plan or MLM is a scheme that sells actual products, unlike pyramid schemes that only focus on recruiting more investors. However, selling goods is practiced on the frontline of the company. It is illegal in many countries because you need to ensure more investors join the program to even sell the product. In the section mentioned above, Wealth Pools is an example of MLM.
Chain-emails
Chain emails are another form of pyramid scheme. They are not legally recognized and are meant to deceive. Chain emails come from donations, funds, and collecting money for a good cause.
Several emails are sent out to different people. With the word donation as the main focus, you are requested to send money to the sender. Where’s the pyramid scheme? You have to forward this email and get more people on board this donation trap.
Gifting Clubs
A common type of pyramid scheme is gifting clubs. The common deception is when new members entering the club are required to give gifts in the form of cash to the existing high-ranking members. The catch? Invite more people into the club, convince them to cash in gifts, and you reach the highest levels. These promises lead to a pyramid scheme. They deceive you using the word gift, but it is a grand pyramid scheme.
Like all pyramid schemes, this only benefits those at the top of the pyramid and becomes a great source of worry for those in the end.
How to spot a pyramid scheme?
Pyramid schemes are now introduced to many investors as a make-believe fairy tale. Sometimes it is hard to distinguish between them. But there are recurrent patterns that are apparent in all pyramid schemes. Here is how you can spot one:
- If the company asks you to upload or instead “invest” a set amount of money.
- If the company requires you to bring in a specific number of people into the circle.
- If sales are not the priority of the company
- If they promise you double the amount paid back in a small time frame.
Wherever you see these signs, run in the opposite direction and refrain from joining. It is a transparent pyramid scheme. Let’s look at these closely.
Invest your money and earn more with every investment
The first thing those who are a part of the pyramid scheme ask you to do is to invest some money. They may ask you to invest $100 or $1,000, or even more. When you hand the prescribed amount of money to them, they promise you a return that would be doubled or even tripled.
So let’s say you invest $3,000 into this pyramid scheme and are expected to, but you don’t need to sell any product or service. By the time you reach the agreed-upon time, you will have $6,000 or $9,000 in your bank.
It sounds attractive. But it is precisely what has caused people to fall into this trap. The money you gain does not depend on how many products or services you sell. It depends on you bringing in new investors. This is one way to spot a pyramid scheme. You are asked to spend some money. But for clarity’s sake, they call it an investment.
Invite more investors into the plan
This is mandatory for every pyramid scheme other than investing money. You need to bring in as many recruiters as you can. The more investors you bring into the company, the more likely you can earn more money. Taking the above example.
You are required to invest $3,000 but invite 3 more investors to become a part of this plan. You will earn $9,000 from each of these investors, who will be triple the amount you invested. This makes the whole scenario seem profitable, and it continues. If instead of inviting 3, you bring in 4 investors, you earn more and are more beneficial than your peers. This is another way to identify a pyramid scheme when you are expected to bring in more people.
No sales required
You can identify a pyramid scheme when the recruiter does not know the focus on sales. At all! When pyramid schemes are introduced, they are hidden under the image of making sales. You are asked to ensure sales, whether they are products or services. However, once you realize that more emphasis is placed on the top two aspects: investing money and inviting more people to invest money. You will eventually understand the actual meaning behind this program.
They might ask you to make those sales, but they never return and ask about it. The deals are just a cover-up. The real motive is to invite more people and invest the prescribed amount of money. Once you have fulfilled these two requirements, you do not have to work and spend time selling a product or a service to anyone.
This hidden tip can help you spot a pyramid scheme from a mile away.
Conclusion
Pyramid schemes are usually hidden under fake names. Many people either are not able to identify a pyramid scheme or are not aware of the repercussions of pyramid schemes. At first, it sounds good and promising. But once you enter the circle, you soon become prone to failure. Pyramid schemes always fail and lead to numerous losses. It is a game that results in you ending up with a massive dent in your bank account.
Pyramid schemes are actually too good to be true. You are deceived into investing money and are promised to become rich in a matter of days. However, the end result is not worth all the hassle. Many people refrain from enlisting in pyramid schemes because of the inevitable punishment they have to bear.
