8 Warning Signs of a Pyramid Scheme

Go Banking/September 6, 2022

By Heather Taylor

Pyramid schemes, according to the U.S. Securities and Exchange Commission, are a type of fraud where participants profit almost exclusively through recruiting other people to join their programs. How do you know whether someone is trying to recruit you into a pyramid scheme or multi-level marketing scheme?

There’s Nothing for Sale

What is it you are selling, exactly? In a pyramid scheme, the SEC says, no genuine product or service is sold. Sometimes fraudsters will give products or services fancy-sounding names in order to make the company appear to be legitimate. If you find there’s no underlying product or service being sold, or what is being sold is hard to value, speculative or appears to be inappropriately priced, exercise caution.

Some fraudsters choose fancy-sounding “products” to make it harder to prove the company is a bogus pyramid scheme.  

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Recruiting Is the Primary Emphasis

Many pyramid schemes and MLM schemes emphasize the importance of recruiting new participants. Programs that emphasize recruiting participants, and paying a fee, to join the program are likely pyramid schemes.

Easy Money

Earlier, we mentioned it’s tempting to try out a pyramid scheme because it promises the ability to earn easy money.

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However, the SEC says you may be part of an illegal pyramid scheme if you are offered compensation in exchange for doing little work like making payments, recruiting others or placing online ads on obscure websites. Be wary of the promise of easy money.

Promises of High Returns in a Short Time Period

Any program that offers fast cash quickly is something to be rightfully skeptical about. According to the SEC, this could mean commissions are being paid out of money from new recruits rather than revenue generated by product sales. Exercise caution with pitches for “get rich quick” claims and exponential returns.

Complex Commission Structure

How will you be compensated? One of the biggest hallmarks of a pyramid scheme is a complex commission structure. Unless commissions are based on products or services you or your recruits sell to people outside the program, be cautious.

No Demonstrated Revenue From Retail Sales

You have the right to ask to see documents, like financial statements audited by a CPA, that show the business generates revenue from selling its products or services to people outside the program. If the business is not willing to share these documents, it is very likely a pyramid scheme.

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Your Buy-In Is Required

Joining the program may require you to pay to join. Even if the buy-in is a nominal one-time or recurring fee, be cautious about any required buy-ins. Be mindful of other things you may be asked to pay for, like levels of stock that are difficult to sell and cannot be returned or expensive training seminars.

You Aren’t Allowed To Ask Questions

Do you have questions about this amazing business opportunity? Do you want to learn more and can’t rely on jargon used during the presentation like “pre-launch” or how to “get in on the ground floor”?

Pyramid scheme presentations are often high energy and low on substance. If you can’t ask questions or questions are not encouraged, the best approach may be to avoid this “business opportunity” entirely.

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