Pyramid Schemes on the Internet
Be wary of messages that read: "How to Make Big Money From Your Home Computer!!!" One online promoter claimed that investors could "turn $5 into $60,000 in just three to six weeks." In reality, this program is nothing more than a classic "pyramid" scheme.
A pyramid scheme is a scheme in which a hierarchy is created by people joining under others who joined previously, where those who join, make payments to those above them in the hierarchy, with the expectation of being able to collect payments from those who join below. All pyramid schemes rely on increasing numbers of unsuspecting investors to buy into the bottom of the chain in hopes of taking money out once they reach the top. Because e-mail is practically instantaneous, relatively anonymous and incredibly cheap, it is an almost ideal vehicle for this type of scam. Like other scams, a pyramid scam may promise rates of return that seem just too good to be true for little or no effort on your part, or it may initially be vague about what your initial investment will go toward. What happens in a pyramid scheme is that existing investors are paid a return based on the promotersí ability to raise new funds; once the fund raising stops, later investors cannot be repaid and the pyramid collapses.
These schemes always cheat most of the participants. Most people who participate in these pyramid schemes lose, because sooner or later, no new participants can be recruited to keep the scheme going. Posters who start these threads claim it will work if everyone is "honest." In fact, with the usual send-this-message-to-five-people scheme, it only takes 15 steps in the scheme before the total number of participants must be 7.6 billion -- larger than the Earth's population -- in order for the scheme to continue.
Let's look at a hypothetical pyramid scheme, with respect to how it is claimed to work. Suppose the list included in this scheme contains six names. You are to send a dollar to each person listed, remove the top name, move all the other names up one position, and send it on to more people. Let us assume, that you get ten people to join, and each of them gets ten people, and so on.
As the pyramid grows below you, here is what supposedly happens:
It's very easy to understand how this kind of scheme should work. It all seems so simple and so obvious. The truth is, this scheme does not work, except for those who get in at the first few levels. The vast majority of participants in such a scheme will only lose their original investment, and make no profit at all.
How to Avoid Being a Victim of Pyramid Schemes
Some multilevel marketing plans are legitimate. However, others are illegal pyramid schemes. In pyramids, commissions are based on the number of distributors recruited. Most of the product sales are made to these distributors - not to consumers in general. The underlying goods and services, which vary from vitamins to car leases, serve only to make the schemes look legitimate.
Joining a pyramid is risky because the vast majority of participants lose money to pay for the rewards of a lucky few. Most people end up with nothing to show for their money except the expensive products or marketing materials they are pressured to buy.
If you're thinking about joining what appears to be a legitimate multilevel marketing plan, take time to learn about the plan. What's the company's track record? What products does it sell? Does it sell products to the public-at-large? Does it have the evidence to back up the claims it makes about its product? Is the product competitively priced? Is it likely to appeal to a large customer base? How much is the investment to join the plan? Is there a minimum monthly sales commitment to earn a commission? Will you be required to recruit new distributors to earn your commission?
Be skeptical if a distributor tells you that for the price of a "start-up kit" of inventory and sales literature - and sometimes a commitment to sell a specific amount of the product or service each month - you'll be on the road to riches. Often consumers spend a lot of money to "build their business" by participating in training programs, buying sales leads or purchasing the products themselves. Too often, these purchases are all they ever see for their investments.
If you decide to become a distributor, you are legally responsible for the claims you make about the company, its product and the business opportunities it offers. That applies even if you're repeating claims you read in a company brochure or advertising flyer. The Federal Trade Commission advises you to verify the research behind any claims about a product's performance before repeating those claims to a potential customer.
In addition, if you solicit new distributors, you are responsible for the claims you make about a distributor's earnings potential. Be sure to represent the opportunity honestly and avoid making unrealistic promises. If those promises fall through, remember that you could be held liable.
Do not be fooled if the scheme includes some form of "reports" or lists or other pieces of "information" that you are supposedly buying from those above you, and selling to those below you. In nearly every case, these intangible products have no value imputed to them, other than that which can allegedly be gained by copying and reselling them. The purpose of these reports is not to provide valuable information, but to provide a pretext by which one participant in a pyramid scheme collects money from other participants.
The amount lost in these types of schemes is dependent upon the amount invested. Those in the lower ranks of a pyramid scheme pay less than those in the upper levels of the pyramid who stand to lose more.
Pyramid schemes produce no goods of any significance, and they provide no service. They create no wealth. All they do is move existing wealth. Every dollar that one person gains through such a scheme is a dollar that someone else has lost.
Legalities, Laws & Repercussions
schemes are prohibited by the laws of the
Participants of pyramid schemes are viewed as people involved in illegal activity rather than as victims. Most perpetrators accused of this type of scheme are typically charged with the felony crime of commercial gambling. Perpetrators may also be brought up on misdemeanor charges for the solicitation of a pyramid club, punishable by time in jail and/or a fine.
Settlements in pyramid scam cases often times prohibit defendants from ever engaging in any other pyramid or marketing scheme in which a person derives income primarily from recruiting others into the program. The defendantís assets are typically frozen by the court and placed under the authority of a receiver who will implement a redress plan. These settlements also prohibit the release of consumersí names that were recruited to join the pyramid scheme.
Security & Prevention
Be aware of posters that claim pyramid schemes are completely legal, claiming they are mailing lists or recipe services. These posters may even cite Title 18, sections 1302, 1341, 1342, and 1343 of the "Postal Lottery Laws." These sections are part of the U.S. Code. I'm sure that none of these people have actually read them, because they do not authorize pyramid schemes. In fact, these are the very laws that make pyramid schemes illegal.
All responsible Internet sites have developed policies against posting pyramid schemes. Users are typically notified of these policies when given an account. Some of the people affected and/or offended when a pyramid scheme has been posted will send copies to your site. Your system administrator may let you off with a warning, but you could have your Internet access suspended or revoked. If posting from school or work, users could be disciplined for using the institution's computers to post pyramid schemes.
In addition, the FTC has published a free brochure, "Profits in Pyramid Schemes? Don't Bank On It," that warns that consumers should:
The Better Business Bureau gratefully acknowledges the work of the faculty and students at St. John Fisher College who developed this information for use by the BBB.
This information is general in nature and is not intended as a reliability report on any company, product, or service.