What Is a Pyramid Scheme?

Pyramid schemes are a form of multilevel marketing— and they’re illegal. There are several different types, but all of them are scams that typically wind up hurting everyone but the person on top. Here’s a look at what a pyramid scheme is, the different types, and why people tend to get caught up in pyramid schemes.

What is a Pyramid Scheme?

A pyramid scheme is essentially an illicit form of consumerism that demands you pay money to make money by building a pyramid of people. Pyramid schemes are short or long term scams that draw you in by promising money at a quick and easy rate for very little effort. Unfortunately, you’re unlikely to ever make back what you put into it, and no one else is either. The only way to get rich from a pyramid scheme is to start one yourself.

For example, the “leader” (the tip-top of the pyramid) gets 10 people to pay X amount of dollars (for absolutely nothing except promises or for what tends to turn out to be a bunk product). The next tier of members each encourage another 10; they get a percentage of the profits and send the money up to the top. The newest buyins each find another 10 victims, and so on and so forth, ultimately creating a metaphorical pyramid of people who have all been scammed — except for the top of the pyramid, who is probably storing their money in a foreign bank and making plans to skip town.

Types of Pyramid Schemes

It is easy enough to turn just about anything into a pyramid scheme, and there are as many types as there are swindlers. Pyramid Scheme Alert (PSA) describes some of the more common: gifting schemes, affinity schemes, and investment schemes.

Gifting schemes seem to have a tendency to be aimed at women. Participants are encouraged to give donations. The more donations they get, the higher up the pyramid they rise, often through themed groups (i.e. in a dinner party gifting scheme participants would rise through the courses of a meal).

Affinity schemes are geared at particular age, ethnic group, or religious group. By identifying with the group, the scammer gets the target to trust him, often coercing the target into “donating” money for what appears to be a charitable cause.

Investment schemes are structured around stock ownership. Basically, people are encouraged to invest in the stocks of what turns out to be a shell company. Depending on the exact scheme structure being used (i.e. penny stocks), scammers may quickly sell off “existing” stock or eventually merge with a private company. Penny stocks can circulate rapidly through spam emails.

How People Get Drawn In…and Why They Stay

Pyramid schemes can be very involved — they have to appear legitimate. Since the people leading the charge on pyramid schemes generally have nothing tangible or of quality to sell, they create something for targets to connect to: themselves. Once involved in a pyramid scheme, you’re made to feel as if you are part of a family through a sense of belonging. If you try to get out, you’re abandoning your family.

In 2016, an estimated $250,000 was lost in pyramid schemes, almost 400 of which were reported. Through face to face interactions, social networking, the internet, emails, text messages, even the mailbox, pyramid schemes are alive and well. There’s no such thing as getting rich quick, unless it comes in the form of an inheritance.

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