pyramid scheme

pyramid scheme

In the classic “pyramid” scheme, participants try to earn money solely by recruiting new participants, and generally:

  • The promoter promises a high return in a short period;
  • No actual product or service is being sold; and
  • The main emphasis is made on the recruitment of new participants.

All pyramid schemes eventually collapse and most investors lose their money.

Pyramid schemes are often promoted by scammers through social media, Internet advertising, company websites, group presentations, conference calls, YouTube videos, and other means. Pyramid scheme promoters can go to great lengths to make the program look like a business, like a legitimate multi-level marketing (MLM) program. But scammers use the money paid by new recruits to pay back investors from earlier stages (usually recruits as well). At this point, the schemes get too big, the promoter can’t raise enough money from new investors to pay off old investors, and people lose money. Why Are Pyramid Schemes Bad? And Why Do You Need To Stay Away From Them?

These are some of the characteristics of the pyramid scheme :

  • Emphasis on recruitment. If a program focuses solely on recruiting others to join the program at no cost, it is probably a pyramid scheme. Be skeptical if you receive more compensation for recruiting others than for product sales.
  • No actual product or service is being sold. Be wary if what is being sold as part of the business is difficult to value, such as so-called “tech” products or services, such as mass-licensed e-books or online advertising on little-used websites. Some scammers choose “products” that appear fancy to make it harder to prove that the company is a fraudulent pyramid scheme.
  • High return promises in a short period. Be skeptical of promises of quick money; It could mean that commissions are paid from the money of new recruits and not from profits generated from product sales.
  • Easy money or passive income.   There is no such thing as a free lunch. If you are offered compensation in exchange for doing little, such as making payments, recruiting others, or placing online advertisements on questionable websites, you may be part of an illegal pyramid scheme. 
  • There are no demonstrated earnings from retail sales. Ask to see documents, such as financial statements audited by a certified public accountant (CPA), that show the business generates profit from the sale of products or services to people outside the program. As a general rule, legitimate MLM companies derive their income primarily from selling products, not recruiting members.
  • Complex commission structure. Don’t worry unless the commissions are based on products or services that you or your recruits sell to outsiders. If you do not understand how you will be compensated, be cautious.

All pyramid schemes collapse

When scammers try to make money just by recruiting new program participants, that’s a pyramid scheme, and there’s only one possible mathematical outcome: collapse. Imagine if a participant must find six other participants, who, in turn, must recruit six people each. In just 11 layers of the organization’s downline, you would need more participants than the entire population of the United States to maintain the scheme. This infographic shows how all pyramid schemes are doomed to collapse.


The interest, the need, or the greed to obtain large profits almost immediately, is the hook on which thousands of people are hooked when investing in pyramid scams. This is not something new, however, in our country, it is gaining a new boom with the help of the internet and social networks, now with schemes such as “The flower of abundance”, “The loom of dreams” or pyramidal investments.

There has been a great deal of controversy about this kind of pyramidal investment that, although it is true that they have benefited families, there is a greater number of people who have sold their assets to complete the investment that is requested of them and in the end, they are more defrauded than benefited.

In an interview with Mr. Daniel de Loera, an academic from the CUCEA Finance Department points out that within this type of fraud, there are some things to consider: the first is the lack of money and social welfare. It is undeniable that these two factors make citizens vulnerable. The second is the design. Ponzi schemes are designed to lure people who can participate in a production or capital raising scheme that offers them more than normal market schemes.

“They have a very simple operation: they are going to ask you to put a weight, but they are also going to ask you to bring two people to bring two pesos, and those two people are going to bring four people to bring four pesos and those four people are going to bring another eight who bring eight pesos. What’s going on? When the time comes, the base of the pyramid is so wide that there will be no money to pay everyone, only the people at the top of the pyramid receive the promised money, and the rest get absolutely nothing”, comments the Master. From Loera.

We do not realize or do not want to realize the circumstances under which fraud occurs. In other words, the people who make the investment do not investigate whether the person offering the profits is a natural person, an incorporated company, a cooperative, or a financial intermediary, they blindly trust when someone they know assures them that they have won the promised money.

“Money produces money, but what is the scheme? We take our money as an investment to a recognized institution, call it a bank, or call it an investment company or cooperative. They have a building, there is a constituted company, there are entities that regulate it, and so on. When I go in there to take my money, I come out with a document that protects my investment and tells me some very notorious elements: a period of time in which they are going to use my money, the date on which they have to return my money and the interest rate that they agree to pay; These three elements provide certainty and legality”, asserted Mr. Daniel dealer.

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