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Pyramid Schemes

When people hear about direct sales or Multi Level Marketing (MLM) companies many times it is assumed that it is a Pyramid Scheme and that may scare people away from joining a legitimate company.  Here is some basic information to help you identify the structure of a Pyramid Scheme.

What is a Pyramid Scheme?

It is a form of fraud and it involves people enrolling other people into a "phoney" business program that doesn't utilize the sale of products or services. These schemes promise unrealistic pay outs if you recruit other people into the "phoney" business. These types of scams are illegal in many countries including the United States.

Pyramid Schemes have been around for at least 100 years in one form or another. There are many types of schemes out there, but here are a few examples of some so you can be aware.

Pyramid Scheme - Basic Model:

A scheme is usually set up by one individual or a handful of individuals who draft up what 'appears' to be a lucrative business plan. People who join in pay a fee. They in turn have to go out and recruit people into the scheme so that they can make a small percentage of the money that their recruit paid to join the "business". The majority of these "fees" goes to the top people in the scheme. This cycle continues on and on until the scheme finally collapses or the authorities get involved. There are no actual products to purchase and it's mainly a "recruiting" game.

Pyramid Scheme - Eight-Ball Model:

This type of scheme starts with one person who recruits two other people into the scheme. Each of those two people bring in two more people and this continues until that team has fifteen members. Everyone who joins has to pay a fee and once there are fifteen members, the original top leader person takes all fifteen of the joining fees and falls out of the circle. Each member moves up in the circle and it continues as new members are brought in. This type of pyramid scheme is also called a "gifting circle".

Matrix Scheme:

A matrix scheme is like a pyramid scheme except the members pay to go on a waiting list for a product or service and only a tiny fraction of them may get the item. A good example of this type of scheme is that the person at the very top of the matrix scheme will get a vacation trip if he or she recruits 40 members into the scheme. Each member has to pay a fee (or purchase an expensive but worthless item) to join and they are promised that at some point and time they will be the top leader and will receive the vacation too.

All of these examples of Pyramid Scheme are doomed to fail.  Since it is based on recruitment and personal payout only, many people become wise and do not join. The schemes then fall apart and many people have lost their money.