HOW TO DETECT PYRAMID SCAMS
Pyramid Schemes(Ponzi): Structures Doomed to Collapse
We have all heard about pyramid schemes before, but what are they all about? How can some businesses with pyramid models be considered legal and make money? What makes one opportunity a scam and the other not a scam?
There is no doubt that certain business models are illegal by FTC terms. The illegal pyramid scam is one such model. The illegality of this system results from the damage it inflicts on the victims. Business models based on the pyramid principle are unsustainable and inevitably doomed to fail.
How Illegal Pyramids Work
This illegal scheme functions solely on the recruiting of new members into the pyramid scam. A person is told he or she can make substantial returns on the payment he or she made to enter the scheme by recruiting more people to do the same.
Once new people enter the pyramid, their entry payments are paid partly to the person who recruited the new people and partly to the people farther up in the pyramid - in other words, the recruiter of the recruiter of the new people and so on.
Really simply put, money enters from the base of the pyramid and is funneled up the narrowing top of the pyramid , then usually the pyramid falls out as everyone on the bottom is calling it a scam.
The fact most worth most realizing is that the life of the business model is the entry payments of new members or sales to members nearer the model's base, not from sales to people not in the pyramid. This is actually one of the best ways to find an illegal pyramid.
Why Illegal Pyramds Fail
The answer is geometric growth. Because the entire system is supported by money entering from the bottom of the pyramid, new members must constantly be added to maintain the structure. At some point, the possible number of new recruits is exhausted, and no more people enter the program.
Because the pyramid needed those new recruits to be maintained, it collapses. The simple fact is, there just aren't, and never will be, enough people to maintain a pyramid scheme.
For a more detailed explanation as to why these structures inevitably collapse, check out the pyramid example page.
Why Pyramid Schemes Are Illegal
By looking at the example of an illegal pyramid, it's clear that the majority of investors will lose money, because these schemes are doomed to fail.
In most cases, the operator of the scheme is aware that the model is unsustainable, but recruits new members by fraud - covering up the fact that pyramid must inevitably collapse. The pyramid is misrepresented as feasible means for anyone to make a profit on their investment, regardless of when they enter.
Because scammers can so cleverly disguise illegal pyramids, it makes spotting them all the more important.
These schemes have the potential to hurt thousands of consumers by entering them into a business strategy which has no chance of longterm success. To help keep consumer losses to a minimum these schemes have been made illegal in the US and other countries.
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