What is a Pyramid Scheme?

This is another scam that has been around for many years, but keeps popping up and scamming unsuspecting victims taken in both by their lack of skepticism and the abundance of greed, which is a profitable combination for scam artists.

Pyramid schemes are disguised as purported businesses; however, if you carefully evaluate the business you will see that the primary source of profit for the business is in enrolling new members who pay fees to join the business.  The only profit for investors comes from brining more people into the scheme.  In other words, the only way you can make a profit is by becoming a scammer yourself.  Like the chain letter, pyramid schemes are doomed to failure because eventually you run out of people to sustain the growth of the pyramid.

As with many scams, it does have some resemblance to how multi-level marketing companies such as Mary Kay Cosmetics and Amway operate; however, a key difference is that these companies actually sell products.  Pyramid schemes do not.

TIP

A little common sense can go a long way in avoiding pyramid schemes.  The simple question to ask yourself is whether or not the company actually sells products and makes substantial profits through product sales or through the recruiting of new members.  If it is through recruitment, it is most likely a pyramid scheme.  And don’t trust any letters from the IRS or the FTC that appear to support the legitimacy of the company.  Neither the IRS nor FTC ever issues such rulings.   If the operator of the business provides such a letter to you, you can be sure that it is a scam.