A pyramid framework is an ingenious and inefficient business strategy under which certain senior members hire new members who incur upfront expenses for the network only towards participants. In comparison, when prospective members hire their members, the chain is also taking on a portion of the resulting payments. These activities in certain countries are sometimes referred to as “pyramid scams,”. In this blog, we will explain the Pyramid scheme and are pyramid schemes illegal? Stay with us for a more detailed analysis.
According to the rough selling pitches made in recruiting cases, potentially the participants who are audacious enough to dive into the pyramid receive significant cash from members below. However, prospective pools of members begin to become dry over time. And when a pyramid scheme continuously shuts down, top-ranking operators leave tons of currency, while lower-level participants leave zero.
Notice that, as pyramid schemes depend heavily on recruits’ payments, a substantial percentage of real items and services of little significance does not require the selling of any sort.
Pyramid Schemes Types
There are different categories of pyramid schemes that are widespread:
Multi-level Pyramid Marketing Scheme
Marketing at a multi-level (MLM) is a legal market activity, although this model includes the selling of real goods or services, unlike conventional pyramid schemes. However, it is not the duty of participants to close transactions, to raise revenue by hiring members.
Those MLMs are almost distinct from pyramidal structures, since the purchasing of imprinted materials, such as educational lessons, does not have actual meaning. The popularity of these MLM schemes means that recruits are required to purchase these useful goods at high prices and are sold to next-generation members.
Chain Emails convince naive recipients to send all of the emails listed sums of money. The donor is invited, after making the contributions, to withdraw and substitute the prime name from the list before sending the chain to its community of contacts with the expectation that an individual or more of these will send cash. Theoretically, beneficiaries continue to receive donations until their name is excluded from the registry.
Ponzi schemes are investment counter-balances that operate in line with the principle of “Robbing Peter to pay Paul.” They do not follow the pyramid system’s hierarchical structure. Most Ponzi players are often tempted by the promise of a too-good-to-be-true return.
Investment manager Bernard Madoff was sentenced to 150 years in jail for running a multimillion-dollar criminal enterprise, allegedly the most infamous artist in the Ponzi system.2
An example of a true pyramid
In 2008, Canada was struck by a huge pyramid system, promising people an opportunity to benefit themselves by offering low-cost subscription plans for a travel club. To apply, applicants “sellers” had to buy memberships at expensive pricing of $3,200 for the first time. Over 2000 people have released their checkbooks, pledging $5,000 for any related association they have sold. But only after claimant members received $100,000 in revenue, which included the selling off at least 20 subscription plans, could benefit be achieved. But in a downward economy, where people clung hard to their capital, this proved practically impossible. Accordingly, aggravated investors filed a class-action case, with their funds being recovered and the system being dissolved.
In certain nations, pyramid structures are unconstitutional. The benefit paradigm, using the network effect, also traps people to hire people who may feel lean for those involved and eventually stress relationships. For such strategies, investors should be careful or just stop them entirely.