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Pyramid Schemes, also known as Pyramid Selling, Pyramid Games, Illegal Pyramids, and Pyramid Scams, are illegal in almost every country on the planet, and for good reason: they are mathematically doomed to fail and are little more than a way of transferring money from a large group of people to a smaller group of people.
Their main feature is that you earn money by recruiting others to join the scheme; but, if no more people join, the plan will collapse, leaving those who were the last to join out of pocket.
Examples
- AirPlane Game
- One example is the infamous aeroplane game of the 1980s.
- People were encouraged to buy tickets as passengers on an imaginary aeroplane.
- The plane would have 8 passengers, 4 flight attendants, 2 co-pilots, and a pilot.
- The Pilot would collect all the ticket money, and afterwards the 2 co-pilots would separate into 2 new planes, taking the roles of pilot, with the flight attendants becoming co-pilots, and the passengers flight attendents.
- The flight attendents would then be responsible for recruiting new passengers.
- The game would eventually "collapse" when there are no more people willing to pay their $1500 to buy a "ticket". [1]
Product Based Pyramid Schemes
- More sophisticated pyramid schemes operate in much the same way, except that instead of a ticket on an imaginary aeroplane, participants receive some kind of product or service in return for the cash they put into the scheme.
- The products and services however, have little intrinsic worth.
- Participants then receive a payment for each additional person they bring in to the scheme.
- The products/services are essentially worthless;
- participants do not use or consume them themselves, do not reorder them, and have no possibility of selling them to others;
- thus there is no way to earn money after joining except through recruiting of others into the scheme. Eventually there will be no further people able to be recruited, and the scheme collapses.
Laws regarding Pyramid Schemes
United States
- The Federal Trade Commission (FTC), along with individual states, is responsible for policing illegal marketing schemes in the United States.
Definition of a Pyramid Scheme
- In 1998, Debra Valentine of the United States Federal Trade Commission, had the following to say about Pyramid Schemes -
- Pyramid schemes now come in so many forms that they may be difficult to recognise immediately.
- They do, however, all have one thing in common
- . They promise large profits to consumers or investors based primarily on recruiting others to join their programme, rather than profits from actual investments or sales of goods to the general public.
- Some schemes claim to sell a product, but the product is often just a ruse to conceal the pyramid structure.
- Inventory loading and a lack of retail sales are two telltale signs that a product is being used to hide a pyramid scheme .[2]
The United States Court of Appeal for the Ninth Circuit stated in Webster vs Omnitrition[3]:
A test has been established by the Federal Trade Commission to determine what constitutes a pyramid scheme. Participants pay money to the company in exchange for (1) the right to sell a product and (2) the right to receive rewards for recruiting other participants into the programme that are unrelated to the sale of the product to end users.
"As is obvious, the presence of this second element, recruitment with rewards unrelated to product sales, is nothing more than an elaborate chain letter device in which individuals who pay a valuable consideration with the expectation of recouping it to some degree via recruitment are bound to be dispirited" .[3]
The key feature, indeed a necessary feature, of an illegal pyramid scheme in the United States is that participants receive payments when they recruit other participants, as defined by the legal term sine qua non.
Union européenn
The EU parliament passed the Unfair Commercial Practices Directive in 2005, which went into effect on December 12, 2007[4] throughout the EU and required member states to outlaw a variety of practises, including Pyramid Schemes.
14. Creating, operating, or promoting a pyramid promotional scheme in which a consumer pays a fee in exchange for the chance to receive compensation based on the introduction of new consumers to the scheme rather than the sale or consumption of products .
In a pyramid promotional scheme, as in the United States, participants are compensated primarily by introducing others to the scheme; however, the directive explicitly considers the possibility of legitimate schemes with participants who are also consumers of the products.
The Office of Fair Trading and the Department for Business, Enterprise & Regulatory Reform (BERR), formally known as the Department of Trade & Industry, enforce the Fair Trading Act, as amended by the Trading Schemes Act 1996 and the Trading Schemes Regulations 1997[6]. (DTI).
According to the website of the Office of Fair Trading,
Pyramid schemes are unlawful, and they are'money-making' clubs that claim you can earn a lot of money by recruiting new members once you pay a fee, but only the top gain money, and the schemes always collapse, leaving you out of cash.
Pyramid schemes do not create new money; instead, an infinite supply of new members would be required for everyone to receive the money on offer, which is impossible. As a result, these schemes must eventually fail, resulting in the majority of members losing their money .[6]
According to the BERR website:
* Dealing schemes become illegitimate and unlawful when, despite claiming to give business possibilities, the only purpose of the programme is to gain money by recruiting additional participants rather than trading in products or services, a practise known as "pyramid selling."
* "Pyramid schemes" include a wide range of fake programmes that do not claim to trade in products or services but are recognised as "pyramid schemes," such as chain letters or games.
* In order for everyone to profit, all of these false schemes require an unending supply of new participants; yet, because the supply will always be finite, the pyramid will eventually fall, and most participants will lose their money .[7]
The main characteristic of "pyramid selling" is that money is generated through the recruitment of new participants rather than through the exchange of goods or services.
Australia
The Commonwealth Trade Practices Act 1974, which is enforced by the Australian Competition and Consumer Commission (ACCC), covers Pyramid Schemes in Australia. Section 65AAD of the Trade Practices Act[8] states:
A "pyramid selling scheme" is one that has both of the following features:
(a) Some or all new participants must make a payment (a participation payment ) to another participant or participants in the scheme in order to participate in the scheme;
(b) the participation payments are entirely or largely induced by the promise made to new participants that they will be entitled to a payment (a recruitment payment) in exchange for bringing in more new participants to the scheme .[8]
What the ACCC has to say about Pyramid Sales Schemes[9] -
- People typically pay to join and are promised a commission for introducing others; this appears to be an appealing investment with the potential to generate a large sum of money later on, but participants frequently lose their initial investment
- If a proposal includes financial incentives for recruiting people, it could be considered an illegal pyramid scheme.
- * offers of low-cost or low-value goods or services made solely to promote the schem
- * a one-time financial outlay to buy large quantities of goods, or
- * There are no goods or services for sale.
- A necessary feature of an illegal pyramid selling scheme in the United States, as well as elsewhere in the world, is the provision of financial incentives for recruiting people to the scheme.
- New Zealand is a country in the Pacific Ocean.
- The Fair Trading Act, which is enforced by the Commerce Commission in New Zealand, covers Pyramid Schemes. The Fair Trading Act - A General Guide[10] states:
- A pyramid scheme can take many different forms, but it must include the following elements
- * it provides a financial return based on new recruit payments;
- * the return is dependent primarily on the continued recruitment of new members, not sales of a product or service.[10] .[10]
Commonalties
Clearly, anti-pyramid laws around the world all have a common thread - you earn income through recruiting others into the scheme. If recruiting stops, the income stops. If nobody else can be recruited, the most recent recruits cannot recoup their investment.
Multi-level Marketing
In legitimate multi-level marketing businesses, income is not earned through recruiting, it is instead earned through the sale of legitimate products to legitimate consumers. If 1000 people are recruited, and no products are sold, no income is earned. Conversely, if no people are recruited, but products are sold, then income is earned. Like any business, the income is based on the sale of goods and services, not on recruiting others into the "scheme".
Unfortunately commentators often confuse the marketing strategy of recruiting others as a method to increase product volume with illegal pyramids goal of recruiting others in order to receive compensation for the recruitment. The goal of an illegal pyramid is to recruit as many people as possible. The goal of multi-level marketing is to increase the sale of goods and services as much as possible.
Why the focus on recruiting in Network Marketing?
One word - leverage. Industrialist John D. Rockefeller reportedly said "I would rather earn 1 percent off a 100 people's efforts than 100 percent of my own efforts."[11]
"Recruiting" in Network Marketing is essentially done for the same reason a clothing store might employ more staff or open an additional outlet - to increase sales volume through leveraging the time of othe
