What Is A Pyramid Scheme? – Forbes Advisor
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A pyramid scheme is an illegal financial scam masquerading as a legitimate business. Pyramid schemes are similar to Ponzi schemes and multi-level marketing (MLM) companies, but there are important distinctions among these three structures.
What are the telltale signs of a pyramid scheme? Here’s a look at how pyramid schemes work, and how to tell them apart from an MLM or a Ponzi scheme.
What Is a Pyramid Scheme?
A pyramid scheme is a scam where a so-called marketing company promises to help you earn big profits in exchange for recruiting new participants into the scheme.
On the surface, a pyramid scheme appears to be a legitimate company selling products or services, but the core goal is always to grow the number of participants in the scheme rather than grow product sales. New participants are typically referred to as investors, salespeople, agents or distributors, or some variation on these titles.
In a legitimate business or an MLM, salespeople are compensated for selling products or services. The compensation structure tends to reward participants for recruiting an ever-growing number of new participants—not for growing product sales.
Typically, pyramid scheme participants are charged membership fees and commissions, and must buy set amounts of product inventory every month in order to…