Illegal pyramids typically involve a few people at the top who get their friends and relatives to give them money in return for the chance to recruit more participants. These scams are called "pyramids" because they depend on an ever-increasing supply of willing participants. Pyramids inevitably collapse because it is impossible to recruit enough people to support the scam.
Ponzi schemes. Similar to pyramid schemes, ponzi schemes are another type of fraudulent investment that relies on an ever increasing pool of participants. Ponzi schemes can be sustained for a longer period of time than a pyramid scheme because participants often reinvest in them after seeing abnormally high short-term returns. Unfortunately, what they are actually seeing is their initial payment, and that from subsequent investors, falsely repackaged as profit. Ponzi schemes ultimately collapse for a number of reasons: the con may grow too large for the promoter to keep up with, the volatility of the stock market may compel a number of investors to withdraw their funds all at once, or the promoter, and money, simply disappear.
Use your common sense. Not only are pyramid and ponzi schemes illegal, participating in them can cost you far more than you bargained for.
- If you do not understand the nature of an “investment” opportunity, do not join.
- Beware of pitches for “business opportunities” that resemble games, chain letters, buying clubs, mail-order operations or investment companies – these are common disguises for pyramid schemes.
- If an offer sounds too good to be true or the profits seem exaggerated, turn it down.
- Be wary of opportunities that promise instant wealth. Aside from winning the lottery, it takes legitimate hard work and dedication to earn a profit.
- Is the incentive to sell a product or recruit new members? If the return for your investment depends on your recruiting skills rather than how much you can sell, it’s probably illegal.
- If the product costs more to buy from the organization than it does in a local store, then you’ve probably been invited to break the law.
Do your research. Do some basic online research about the company and the products or services they sell. Search DOJ’s online database of consumer complaints, Be Informed, to see whether anyone else has expressed concern about the company.
Report a Pyramid Scheme. If you think you’ve encountered a pyramid scheme, please call the Attorney General's Consumer Hotline at 1-877-877-9392 or file an online Consumer Complaint Form.
Learn More from the Federal Trade Commission and the U.S. Securities and Exchange Commission
Applicable State Law: