Pyramid selling is a fraud. It is a mechanism by which promoters of so-called "investment" or "trading" schemes enrich themselves in a geometric progression through the payments made by recruits to such schemes. Related deceitful schemes have been described in various international jurisdictions as "chain letters," "snow balls," "chain selling," "money games," "referral selling" and "investment lotteries".

Numerous legislatures around the globe have proscribed pyramid selling. The wording of relevant statutes, codes, articles, acts, regulations and the like vary, but all contain the following core concept: A pyramid is a scheme in which a recruit pays (an entry fee) for the opportunity to receive future benefits (money or privileges) which are primarily derived from that recruit's (and/or subsequent recruits') introduction of additional participants in the scheme, rather than from the sale of products to consumers.

Thus, the scheme's rewards effectively come from the addition of new participants and their investments, not from the sale and distribution of real products to persons who actually use or consume them. No real trading in viable goods or services takes place, and the scheme essentially involves an internal redistribution of wealth from new entrants to the promoters. The scheme serves no legitimate commercial function. The only "trade" being carried on is actually in scheme participants' rights, and the redistribution of participants' entry fees or investments.

Pyramid schemes are not commercially sustainable because they essentially assume an inexhaustible flow of recruits - all willing to pay to enter the scheme and to be enriched by subsequent recruits doing the same thing. As the number of available recruits is finite, however, successive recruits have arithmetically less chance of enrichment than the schemes' promoters. Consequently, such schemes are usually short-lived and those who enter last have virtually no chance of recovering their entry fee much less benefiting from the scheme.

Early pyramids were readily identified and successfully proscribed because of their lack of tangible product. Subsequent fraudulent schemes, however, have attempted to deceive the public and avoid prosecution by asserting that they are genuine businesses operating a multilevel marketing plan since they "sell" goods and services. Multilevel marketing is, of course, a well-recognized means of compensating direct sellers for the sale of products to consumers, including participants in the plan, through a network of independent distributors.

A closer inspection of a pyramid scheme's so called "products" typically reveals that they have no real market value. This is because the products are often "gimmicks" such as certificates, spurious training programs or magazine subscriptions, illusory discounts, or over-priced and under-performing "miracle" treatments and the like. Recruits are often obliged to "invest" in large quantities of these products with no realistic prospect of marketing them to actual consumers (or returning them for credit). Their investments, however, generate substantial income for the promoter who enticed them into the scheme.

The following factors differentiate illegal pyramids from lawful Direct Selling businesses:

1. Legitimate direct selling companies offer a genuine business opportunity based on the sale of quality products to consumers. They routinely offer consumers satisfaction guarantees or cancellation rights so that the consumer may return the product for replacement or refund if the consumer is dissatisfied. Pyramids schemes have no such commercially viable product sales base.

2. Legitimate direct selling companies strongly discourage overstocking of inventory and provide participants leaving the plan with an opportunity to return any unused, saleable merchandise to the company for a refund of not less than 90% of the salesperson's net cost. In contrast, pyramid schemes often encourage or require large stocks of non-refundable inventory and disappointed scheme participants are then left with stock which they can neither sell nor return.

3. Legitimate direct selling opportunities may be taken up with minimal start-up costs and little or no inventory investment. Even modest entry fees may be refundable if the new direct seller decides not to pursue the opportunity. Conversely, pyramid selling schemes often require high entry fees and/or substantial "investment" in inventory, and neither are refundable. This is because pyramid operators make their money from new recruits to their schemes.

4. The sales and marketing plans of credible direct selling companies are based on the progressive recognition and reward of direct sellers for the development of a customer base for consumption of the company's products. The development and stability of a direct seller's business is dependent on satisfied consumers and fairly remunerated direct selling network members. Pyramid schemes, on the other hand, offer get-rich-quick schemes to induce participants to buy "ground-floor" or "leadership" positions. In pyramid selling schemes there is no viable, long-term business opportunity.

ILLEGAL PYRAMID SCHEMES AND LEGITIMATE MULTI-LEVEL MARKETING

STRUCTURE VERSUS OPERATIONAL

• Almost all organisations, irrespective of whether they belong to direct-selling, conventional business or government departments, are pyramidal or hierarchal in structure.

• In terms of structure, therefore, there is some similarity between pyramid schemes and all other organisations.
• The important distinction between pyramid schemes and other organisation, however, is in the operational area. That is to say, does its operations follow a chain letter principle? In terms of income, do members of the organisation derive income from the mere act of recruiting? Are there actual sales to end consumers in the company's operations? To join the business, do participants have to pay a high entry fee? And if one wishes to opt out of the business, is there a provision for him to recover his money?

DIFFERENCES BETWEEN LEGITIMATE DIRECT SELLING COMPANIES COMPANIES AND PYRAMID SCHEMES