Pyramid scheme is a fraudulent investment plan in which the plan’s creators and its first investors profit, but most other investors lose their money. Pyramid schemes are usually designed to take advantage of people with limited knowledge of business and finance. Such schemes are illegal in the United States, Canada, the United Kingdom, and many other countries.
Promoters of pyramid schemes seek to profit by collecting money from new participants. The promoters claim that the plan enables people to obtain a great deal of money quickly and easily. They tell new participants that the best way to make a profit is to recruit other people to invest. Money from the new recruits goes to pay off the plan’s creator and the early investors. As new participants join, the arrangement develops the structure of a pyramid. A small number of people—those who began the scheme or who joined early—occupy the upper levels, and large numbers of participants occupy the lower levels. Eventually, pyramid schemes end when people at the bottom levels are unable to recruit new participants. The people at the bottom of the pyramid thus lose the money they invested in the scheme.
People who operate pyramid schemes often claim that the schemes are legitimate businesses involved in the sale of goods or services. However, actual product sales have little or no importance to pyramid schemes. The collection of money from new participants is the focus. Many promoters of pyramid schemes use chain letters to recruit new participants.
Other forms of fraud—such as Ponzi schemes—resemble pyramid schemes. They seek to persuade people to pay money into a plan in hopes of receiving more money at a later date. Like pyramid schemes, such schemes usually result in the loss of money.
See also Fraud .
