What is a pyramid scheme?

If you’re involved in a business or organization that relies on making money from recruiting investors — specifically the act of the owners or initial promoters of the business using investor recruitment, which in turn requires those investors to bring on more investors, and then those investors to bring on more investors — you may be a part of a pyramid scheme. 

Essentially, those people placed highest in the “pyramid” are the only ones who typically make any significant money in “the business,” because the lower levels in the pyramid — usually a much larger group than those at the top — are really using their investments to pay the top tiers.

Eventually, those lower tiers will be unable to continue investing if they aren’t making any profits and the scheme will come to an end. Often those people at the top who have taken advantage of the lower tier investors will have moved on to a new scheme, leaving those at the bottom holding the empty bag. 

People who unknowingly invest in pyramid schemes usually have good intentions and have simply been taken advantage of. They don’t realize that they’ve been duped into investing in a fraudulent business. 

Pyramid schemes are illegal in the state of New Jersey. Depending on the nature and severity of the crime, pyramid schemes can be classified as misdemeanor or felony crimes. 

Are pyramid schemes the same as Ponzi schemes?

Though there are some similarities between pyramid schemes and Ponzi schemes, they are different. Though both schemes require continuous injections of cash from unknowing investors in order to sustain the scheme — and both schemes are centered on the idea of investment leading to profit  — the primary difference between the two schemes is that with a Ponzi scheme, investors are usually giving money to a portfolio manager or someone in a similar finance-type role. Pyramid scheme investors are usually recruited by a person who was themselves recruited into the scheme, as their profits are designed to grow the more people they are able to bring into the organization. 

The Ponzi scheme is named after its most famous originator, Charles Ponzi, an Italian man who made his name infamous in the United States and in Canada in the 1920s by devising a variety of schemes that defrauded his victims out of their money. 

Are pyramid schemes and multi-level marketing different? 

Much like Ponzi schemes, there are differences and similarities between a pyramid scheme and a multi-level marketing (MLM) scheme. 

Money is made at the top by the creator of the scheme and those layers of investors who are closest to the top. The more people that can be recruited into the multi-level marketing scheme, the more money generated at the top, and the more that the people at the bottom believe they too can make money from this arrangement. 

An important difference between a pyramid scheme, a Ponzi scheme, and a multi-level marketing organization is that an MLM sells a product or some tangible good. 

A contemporary example of a multi-level marketing organization that has been accused of taking advantage of its investors is LuLaRoe, an apparel company that centered on investors, largely stay-at-home moms and families, into selling its products — leggings, shirts, and other apparel. 

People wanting to sell these goods were required to make an initial purchase order, ranging between five and ten thousand dollars, and then became retailers. These retailers were then encouraged to bring on other investors, and were given bonuses for each person who became retailers. 

Skeptics of the organization’s practices likened this business model to a pyramid scheme, given that many, according to accusers, often made little to no profit on the clothing sales, but would receive significant bonuses when they brought on more salespeople. Over time, once the markets were saturated with sellers, those late to the game could neither bring on more salespeople or sell their products. 

Are multi-level marketing organizations legal?

Multi-level marketing, despite its similar structure to a pyramid scheme, is a legal business practice, largely due to their selling tangible goods and services. Pyramid schemes are designed to fail, whereas MLMs can often survive or even morph into different companies. 

What do I do if I find I’m a part of one of these schemes? 

Typically, the longer you’re involved in one of these companies or schemes, the more you’ll be required to invest.

Our recommendation is to remove yourself from the organization as quickly as you are able to. Due to the fact that most of these organizations require some level of financial investment in order to participate, there is a high likelihood that you will lose money, if you haven’t already.

If you’re concerned that you personally could face litigation due to your involvement in an MLM or other potentially fraudulent activity, then it all depends on how close to the top you were during its activity. 

Your accusers would have to be able to prove that you knowingly and intentionally participated in fraudulent activity, which can be difficult, especially when you have the right defense. 

Concerns about being implicated in fraudulent activity? You deserve a strong criminal defense. The Law Offices of Robert J. DeGroot is here to protect your constitutional rights. Contact us TODAY for your confidential consultation.