A pyramid is an investment scheme in which a participant primarily makes money by recruiting members who, in turn, make money primarily by enticing others to join.
The focus is on recruiting participants, not on selling a product. Products that are sold are overpriced or nearly worthless.
If you are considering a product-selling investment, be cautious. If the opportunity for income is primarily derived by recruiting more investors or salespersons rather than by selling a product, the plan probably is illegal.
Claims that a promoter makes concerning the investment opportunity often are exaggerated and misleading. Since few products are sold, most of the money generated is through recruitment of members.
When recruitment slows, the marketing system collapses, leaving most participants with losses.
The chain letter, a common type of pyramid operation, involves sending letters to individuals, sometimes requesting a small sum of money. A promise is made to persons responding that they will receive many times their investment by following the same procedure.
Another chain letter recommends that the consumer buy four reports regarding multilevel sales, each for a nominal sum. The consumer then is to add his name on the list as a seller of the reports.
Recruiting people to participate in a pyramid scheme is a felony, punishable by up to four years in prison, up to a $5,000 fine or both.
Every person who recruits another participant into the pyramid can be sued for twice the amount the recruit paid. If a marketing system is deemed a pyramid, the court can order the defendant to pay civil penalties and consumer restitution.