Pyramid scheme

A pyramid scheme or pyramid scam is a fraudulent business model in which participants earn money primarily by recruiting new members rather than by selling products or services to end consumers or by generating genuine investment returns.

Pyramid schemes depend on an ever-growing number of recruits, making them inherently unsustainable. As recruitment inevitably becomes insufficient to sustain the scheme, most participants—particularly those who join later—lose money, while only a small number of people near the top of the pyramid profit. Consequently, pyramid schemes are a form of fraud and are illegal in many countries.

Pyramid schemes have existed in various forms since at least the mid-to-late 19th century. Although some multi-level marketing (MLM) companies have been found to operate as pyramid schemes, legitimate MLM businesses are distinguished by compensation based primarily on retail sales to end consumers rather than recruitment.

Concept and basic models

In a pyramid scheme, an organization compels individuals who wish to join to make a payment. In exchange, the organization promises its new members a share of the money taken from every additional member that they recruit. The directors of the organization (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially lucrative—whether or not they do any work, the organization's membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid.