In a pyramid scheme recruiting new members and earning money by collecting upfront fees from them is expected. Then, those fees are used to pay earlier investors. Do you know how this scheme functions? Don’t worry. Here, you’ll understand the process and features of this scheme.
A pyramid scheme is a fraudulent technique in which the investors earn cash by hiring others instead of selling genuine products and services. This scheme functions by requesting new investors for an advance payment so they can be permitted to join this scheme. The new investors’ money is utilized to pay off the earlier investors. The new members are then guaranteed payments if they can hire more people into this scheme. Even though the idea behind this scheme may sound simple, it is generally pitched to investors in a disguised form. Therefore, becoming familiar with its working and distinct forms is necessary.
The functionality of a pyramid scheme:
- This scheme takes a pyramid structure.
- It begins with an individual, who is supposed to be the original recruiter, situated at the top of the hierarchy.
- The individual hires one person who must invest a specific amount of capital.
- The original recruiter receives the advance payment from the recruited person.
- If the new recruit wants to recover the invested amount, then he or she must hire more members, each of whom will also make an advanced investment, which is necessary.
- If the recruited individual successfully hires ten or more people into this scheme, then he or she would earn a considerable profit from just a minimal investment.
- Every newly recruited member should recruit more people into this scheme.
- Every ten people brought by an individual on board gets a considerable profit minus the starting payment he or she made to the person who hired him.
- The recruitment progress occurs to the point where the scheme can no longer support itself.
- In such a situation, those at the top of the pyramid structure gain high profits, whereas those at the base lose their invested amount.
- The fact is that although many members can join it, such a scheme cannot sustain for a long time.
- People are programmed to think they’ll earn more profit from their investments.
- But, in reality, this scheme has not usually resulted in the generation of any money, nor have the organizers of this scheme bought any property.
The pyramid scheme has the following features.
- The main focus is on Recruitment:
The concentration is on recruiting more and more members and requesting them for the payment of entrance fees.
- Sale of Products is not focused:
Here, there is no focus on the sale of products or services. Instead, most of the time, goods are a cover for fraud.
- Needs payment of Entrance Fees:
This scheme needs new joiners to pay an entrance fee, which goes to the top-level members.
- No legal paperwork exists:
These schemes don’t work legally, which means there is no legal process for recruiting new people, nor do they give any valid receipts.
- Promises excellent returns in a short span:
These schemes gain the attention of their targets by showing them more earnings and assuring significant profits instantly. Fraudsters always use fake documents to entice new entrants.
- Not listed in public:
The firms operating with this scheme are not listed on any stock exchanges and hence don’t have any reliability.
- No evidence of revenue:
Most of the initiators of this scheme don’t have any financial statements for representing their revenue generated in retail sales by selling products or services.
How should you identify the pyramid scheme?
Below are a few cautioning signals that help you identify the pyramid scheme.
- Don’t get convinced by fancy business models and the vast earnings shown at conferences and meetings. They are set up to trap innocent investors.
- It is most likely a scheme if you are requested for a payment to join.
- Be alert when you come across overpriced products.
- It is better to be dubious about the promises of quick money which could mean that commissions are being paid out of the funds of new investors rather than the revenue produced from the sales of goods.
- In reality, free lunch does not exist. Suppose you are compensated for doing minute tasks such as making payments, hiring others, or placing online ads on obscure websites. In that case, you might be a part of an illegal pyramid scheme.
- Be careful unless commissions are based on products or services that you or your recruits sell to people outside the scheme. It is better to be alert if you don’t know how to get the compensation.
People should be aware of this scheme and its warning signals if they want to keep themselves safe. In addition, they should take responsibility for protecting themselves from this scheme and be informed of the methods used by cheaters who convince people to invest in it.