Pyramid Schemes

Pyramid schemes are illegal under state and federal law. If the plan's way of making money is based not on selling a product or a service, but on recruiting new members into the plan in order to get paid, it is an illegal pyramid.

In these schemes, each participant puts up a set amount of money to "buy in," such as $1000. The first participant gets paid out of receipts from new recruits. New recruits then go on to recruit others. As each new recruit makes a payment, the persons above him in the pyramid get a cut. The potential for large sums of money is promised, as the "business" expands. Persons who get into the scheme early do make money. However, later participants get less and less because it becomes harder to find people willing to pay in $1000.  Any offer that requires upfront money with promises of big profits, which offers no goods or services but is dependent on recruiting others, should be considered a possible illegal pyramid scheme.

Examples are the "Airplane Game" with four tiers labelled as "captain," "co-pilot," "crew," and "passenger" to denote a person's level. Another was called the "Original Dinner Party" which labeled the tiers as "dessert," "main course," "side salad," and "appetizer." Another scheme, "Treasure Traders," used jewelry terms such as "polishers," "stone cutters," "rubies," "sapphires," and "diamonds."

Many schemes try to downplay their pyramid nature by referring to themselves as "gifting circles" or "gifting tables" with money being "gifted."

Beyond causing financial loss, these schemes put every participant in the position of scamming the people they recruit, thus commiting fraud themselves.

More information from the Federal Trade Commission.