What is a pyramid scheme?
A simple pyramid scheme works like this: participants attempt to make money solely by recruiting new participants into the programme. You can recognize a pyramid scheme at the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.
A more elaborate pyramid scheme involves purchasing products for a high amount of money in order to become a “distributor”. The person who recruited you usually receives a 50% commission and the rest goes to the company.
Most disguised pyramids, however, are not this easy to unmask. Pyramid schemes often choose products which are cheap to produce but which have no established market value, such as new miracle products, exotic cures, etc. This makes it difficult to tell whether there is a real consumer market for the products.
What is the difference with legitimate income opportunities?
Some pyramid promoters try to make their schemes look like multilevel marketing methods. Multilevel marketing is a lawful and legitimate business method which uses a network of independent distributors to sell consumer products. Businesses based on pyramid schemes however seldom involve sales of real products or services to which a monetary value might be easily attached. Instead, money is made in typical pyramid fashion, from recruiting.
The difference is clear:
- Pyramid schemes seek to make money from you (and quickly)
- Multi-level marketing companies seek to make money with you and you build your business (and theirs) by selling real products and services to end consumers.
The advantages of direct selling through the multilevel marketing method are numerous:
- you can set your own hours and earn money by selling consumer products supplied by an established company.
- you can also build and manage your own sales force by recruiting, motivating, supplying and training others to sell those products. Your compensation then includes a percentage of the sales of your entire sales group as well as earnings on your own sales to retail customers.
This opportunity to indirectly increase your income has made multilevel marketing an attractive way of starting a business with comparatively little money.
Presumptive elements to identify pyramid schemes
Direct sellers and companies operating in the EU shall refrain from establishing, operating, or promoting a pyramid promotional scheme where a consumer gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the sale or consumption of products. (1)
Further to the pyramid selling ban existing across the EU, DSE adopted in 2013 a list of presumptive elements aimed at helping the consumers and regulators identifying the existence of pyramid schemes. The occurrence of at least two of the following circumstances is indicative of the existence of a pyramid promotional scheme:
- Consumers are obliged to pay a sum of money as a condition to enter the scheme or to continue to participate in the scheme, and they receive nothing in return or only products whose value bears no reasonable relationship to the sum paid.
- Consumers are obliged to purchase the scheme’s products as a condition to enter the scheme and other consumers participating in the scheme are promised or receive compensation derived from such mandatory initial purchases.
- Consumers entering or participating in the scheme purchase the scheme’s didactic or training materials or classes and other consumers participating in the scheme are promised or receive compensation derived from such purchases.
- Consumers leaving the scheme cannot return, for a refund of at least 90% of the original cost, the products or didactic / training materials that are both: (i) unused, undamaged and not past their use-by date; and (ii) purchased within the prior 12 months.
- Consumers are obliged to pay an inordinately large amount of money as a condition to enter the scheme, and the only conceivable way for them to receive compensation equal to or higher than the amount paid is to introduce an unrealistically large number of other consumers into the scheme.
(1) As established by Annex I point 14 of the Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices in the internal market.