Skip to content

Font size: A- | A | A+

Investor.gov Logo for Print
Press Alt + shift + h then Enter to skip to secondary navigation. Mac users press Control + shift + h

Pyramid Scheme

In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants. The hallmark of these schemes is the promise of sky-high returns in a short period of time.

Pyramid scheme promoters may go to great lengths to make the program look like a multi-level marketing program selling legitimate products or services. But these fraudsters use money from new recruits to pay off early stage investors until eventually, the pyramid collapses. At some point, the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and people lose their money.

Ponzi and pyramid schemes are closely related because they both involve paying longer-standing members with money from new participants, instead of actual profits from investing or selling products to the public. Here is how to tell them apart:

 

 

Pyramid Scheme

Ponzi Scheme

Typical “hook”

Earn high profits by making one payment and finding others to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may be "sold" only to other people who also become distributors.

Earn high investment returns with little or no risk by simply handing over your money; often the investment does not exist or only a small percentage of incoming funds are actually invested.

Payments

Must pay a one-time or recurring participation fee and recruit new distributors to receive payments.

No recruiting necessary to receive payments.

Interaction with original promoter

Sometimes none. New participants may enter the pyramid scheme at different levels.

Promoter generally interacts directly with all participants.

How the scheme works

Funds from new participants are used to pay recruiting commissions to earlier participants.

Funds from new investors are used to pay purported returns to earlier investors.

Collapse

Fast. An exponential increase in the number of participants is required at each level.

May be relatively slow if existing participants reinvest money.

 

Additional Information

Investor Alert: Beware of Pyramid Schemes Posing as Multi-Level Marketing Programs