Pyramid Scheme

A pyramid scheme is an illegal scheme of selling goods. Participants are recruited by advertisements offering big profits to those who pay a fee for agency rights, that is, rights to sell goods as a representative of the pyramid company. Each recruited agent then recruits others to join, with each new participant paying a fee to join. The key is that each person is promised commissions not only on his or her sales but also on the sales of other people they recruit as distributors.

In the classic “pyramid” scheme, participants attempt to make money solely by recruiting new participants. The hallmark of these schemes is the promise of sky-high returns in a short period of time. A pyramid scheme is closely related to a Ponzi scheme because they both involve paying longer-standing members with money from new participants, instead of actual profits from investing or selling products. Pyramid schemes collapse when the promoter cannot raise enough money from new investors to pay earlier investors.