Seldom you may have also heard, this company is a pyramid scheme and avoid this scam.
It may create confusion for people who are not familiar with the Pyramid Scheme term. Even most people can’t differentiate between Pyramid Scheme, Ponzi Scheme, and MLM, as they seem the same.
But there are laws and regulations which differentiate among them and vary with legality. This post is a comprehensive guide to understanding laws related to Pyramid Scheme and whether they are legal or illegal.
So let’s start with some basics.
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What is Pyramid Scheme?
The term Pyramid Scheme arises from the “Pyramid Shape” itself.
Pyramid Scheme includes a network of members associated with the scheme that looks like a pyramid i.e. expands towards the bottom.
In a pyramid scheme, existing members recruit new members and vice versa. Pyramid schemes always grow exponentially as members at successive level increase 2 or more times.
Pyramid schemes are directly or indirectly illegal in most countries. An interesting map is shared on Wikipedia.
Pyramid schemes are not only to obey the pyramid structure. The other two, Ponzi scheme and MLM (Network Marketing) companies also share similar systems for distributor networks.
Read: Top 5 Illegal MLM Companies
Pyramid Scheme Vs MLM Vs Ponzi Scheme
There are huge fundamental differences between the three.
| Concept | Pyramid Scheme | Legit MLM | Ponzi Scheme |
| Operation Type | Pretend and operate as MLM using dummy products. | Also called Network Marketing to distribute and market products. | Operate as Investment Scheme. |
| Nature | Money-circulation | Selling products through distributors | Money-circulation |
| Joining | Certain joining cost | Required some product purchase | Investment opportunity with guaranteed returns |
| Commission Type | Pay commission on recruitment | Provide commission on personal or downline product sales. | Heavy returns on investment & referral commission |
| Legality | Illegal in most countries | Legal in most countries | Illegal in most countries |
| Example | Forsage, TriumphFX | Nu Skin, Mary Kay, Shaklee | Zeek Rewards, OneCoin |
The above table shows that Pyramid Schemes and Ponzi Schemes are illegal but MLM is legal. So what are the exact regulations on them?
Pyramid and Ponzi Schemes come under money-circulation frauds, where early investors are paid on the money of new investors. This cycle continues until the company disables payouts and runs away with the investments.
As they spread exponentially most people are at the bottom of the pyramid and lose their money.
Read: Top 5 MLM Companies to Avoid
Are Pyramid Schemes Illegal in the USA?
Now the next question is, Are Pyramid Schemes illegal in all states of the USA?
The answer is, Pyramid Schemes are illegal under state and federal laws.
SEC (Securities Exchange Commission) tries to identify and take down pyramid schemes. But nowadays most pyramid schemes pretend to be MLM and promise higher returns.
In contrast, SEC shared some points to avoid such schemes.
- No genuine product or service
- Promises of high returns in a short time period
- Easy money or passive income
- No demonstrated revenue from retail sales
- Buy-in required
- Complex commission structure
- Emphasis on recruiting
Is Pyramid Scheme Legal in India?
Like the USA, MLM is a legal business in India and the central government issued Direct Selling Guidelines 2016 and Direct Selling Rules 2021 to protect individuals from scams in the network marketing industry.
Direct Selling Rules 2021 state that, promoting pyramid schemes is a criminal offense and citizens avoid such scams.
Ponzi Schemes and other money circulation frauds are illegal in India under Prize Chits and Money Circulation Schemes (Banning) Act, 1978.
Read: Why 99% of People Fail in MLM
How to identify Pyramid Schemes?
As nowadays most Pyramid Schemes pretend to be MLM, and it is difficult for naive to identify such frauds.
But there are a few tips from us to identify pyramid schemes.
- MLM products should be of good quality and pricing should justify compare to the regular market. Overpriced or expensive products are a red flag of pyramid schemes.
- The company should only provide commission on product sales either personal or from the downline. Recruitment-driven commission is common is a pyramid scheme.
- An MLM company should be legally Incorporated in the jurisdiction and follow direct selling regulations.