Pyramid Scheme
Candlefocus EditorPyramid schemes rely mainly on income from recruitment fees, where participants make payments to the organization, often in the form of an up-front fee for joining or for additional products or services. Money earned from recruitment is funneled to those at the higher levels of the organization. Although a pyramid scheme may seem to work in the short term, it it is doomed to collapse because it depends on an infinite number of potential investors who eventually run out.
Pyramid schemes are illegal in many countries, including the U.S., though they are still widespread in many countries that lack strong consumer protection laws. In the U.S., the Federal Trade Commission (FTC) has explicit warnings about the dangers of pyramid schemes, including a ban on recruiting new participants as an incentive to join. Furthermore, the FTC has provided specific cases of pyramid schemes, as well as information on how to spot deceptive pyramid schemes.
A variant of the pyramid scheme is the Multi-Level Marketing (MLM) operation, which is, a legitimate business model where distributors earn money through the sale of tangible goods and from commissions on their recruited distributors' purchases and sales. An MLM operation is distinct from a pyramid scheme in the sense that MLMs encompass product sales, compared to a pyramid scheme that relies primarily on money from recruitment fees.
In conclusion, Pyramid schemes are distinct from Multi-Level Marketing (MLMs) in the sense that they solely rely on money from recruitment fees as opposed to product sales. They are illegal in many countries, including the U.S. The Federal Trade Commission (FTC) has provided specific cases and warnings about the dangers of pyramid schemes, including a ban on recruiting new participants as an incentive to join. As such, it is very important to be aware of the pitfalls of pyramid schemes and to do the necessary research in order to avoid becoming a victim of one.