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One of the primary indicators involves purchase requirements of product. When the purchase of the product is a requirement of participating in the business, and every buyer is a new distributor and there are no 'retail sales' it is a significant red flag for regulatory agencies. When there is a "Pay to Play" requirement, new members are encouraged to make the purchase when recruited. This creates an endless chain of recruits, and once the market is saturated and there are no more recruits, the pyramid collapses.
According to the SEC, Pyramid Schemes are defined as:
Pyramid Schemes
In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.
The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money. |
