Pyramid scheme is defined as an illegal scam that makes money by recruiting new investors as opposed to providing a valuable service or product. This scam is called a “pyramid” because of its recruiting model, where every new investor is urged to bring in 2 or more friends or family.
A few identifying characteristics of a pyramid scheme are:
- New investors must pay the organization to join (sometimes disguised as an opportunity to sell something).
- Investors are urged to recruit their friends and family who must also buy their way in.
- The organization primarily profits off of new recruits instead of selling a valuable product, or service. That money is then split among their recruiters, and their recruiters, and so on up to the top of the pyramid.
A pyramid scheme is often confused with a legal business known as “Multi-Level Marketing” (MLM) or “Network Marketing”. The primary difference between an MLM business is that it earns profit by selling a valuable product or service, NOT by recruiting new members who are required to invest.