A pyramid scheme is an illegal business model in which people earn money by bringing new members into it, not by selling authentic products or services. Pyramid schemes eventually collapse, causing members to lose their money.
If you’re being targeted by a pyramid scheme, there are important things to know.
Read the rest of this article to learn more about pyramid schemes, how to identify them, and how to protect yourself. We’ll also explore when it’s advisable to seek legal guidance.
What are Common Types of Pyramid Schemes?
There are two main types of pyramid schemes. These are:
- Naked pyramid schemes. In this setup, recruits need to pay a fee to take part in an investment opportunity that is said to provide high returns as long as they recruit new members. Instead of any product being sold, the opportunity is openly to recruit.
- Product-based pyramid schemes. Selling products or services is used to hide the reality of the pyramid scheme. New members need to buy a starter kit or pay fees to distribute the products or services. But, they won’t earn much money by doing this. Instead, they will be compensated for recruiting members.
What are Common Signs of a Pyramid Scheme?
You can usually identify a pyramid scheme in the following ways:
- The focus is on recruiting members. This is a telltale sign of a pyramid scheme because the operators will encourage you to recruit new members and mention compensation for doing so.
- The products or services are a ruse. The products or services might be mentioned in a vague or generic way, or they’ll be hyped up to seem attractive to sell. They serve to hide the fact that most income is earned from recruiting new members.
- High-return promises. It’s a red flag if the company makes claims that you’ll receive money very quickly.
- Talk of passive income. You might be told that you’ll earn money without actually working. That should always be a warning sign!
- Early payouts. To make you think that the pyramid scheme is legit and will help you make money, you’ll receive early payouts.
- Delayed payment requests. Even though you might have received money early on, as time goes on you’ll experience payment delays and issues.
What are the Legal Consequences of a Pyramid Scheme?
Every state in the U.S. has different laws that govern pyramid schemes, but they are illegal across the board. When convicted, promoters (the people at the top of the scheme) will have to pay expensive fines or even serve jail time. They can deal with complaints and charges in criminal and civil courts.
Interestingly, people who are recruited into the pyramid scheme can be considered to be perpetrators as well as victims. Even if someone is perceived as a victim of a pyramid scheme, it’s not a valid defense in court for them to state that they were unaware of the business’s illegal nature.
What Should You Do if You’re the Victim of a Pyramid Scheme?
Pyramid schemes are illegal and can be considered a type of business and investment fraud. If you’re the victim of a pyramid scheme, there are important actions to take.
Stop Your Activities Immediately
If you suspect you’re involved in a pyramid scheme, the first thing you should do is terminate your activities immediately. Don’t recruit any new members. This will show proof that you took action as soon as you became aware of it being a pyramid scheme.
Collect Evidence of the Scheme
Try to gather as much evidence as you can about the pyramid scheme. This can include names and titles of operators, their social media pages, their websites and email addresses, any communication you had with them, records of payment, and so on.
Report the Pyramid Scheme
You can report the pyramid scheme to the Federal Trade Commission and the U. S. Securities and Exchange Commission.
Contact a Lawyer
Time is of the essence if you’re involved in a pyramid scheme to protect yourself from having to pay heavy fines or risk jail time. A lawyer will help you build a criminal defense strategy.
The aim will be to show that you didn’t have any intent to commit fraud, you had a real lack of knowledge about the scheme being illegal, and/or that the business model was legitimate.
With legal guidance, you can fight to recover your losses. Lawyers might be able to freeze the organizer’s bank accounts or stop transfers. They can also file claims, such as misrepresentation and fraud, against them.
In cases where there are many victims involved, lawyers can use group actions to put more pressure on the organizers to compensate victims.
What’s the Difference Between a Ponzi Scheme and Pyramid Scheme?
It’s common for people to confuse ponzi schemes and pyramid schemes, but they have some important differences to know about.
Ponzi schemes are a type of investment fraud that promises high returns from a (fake) investment with hardly any risk. But, the reality is that the returns are paid from new investor contributions.
By comparison, a pyramid scheme relies on members to recruit new members so they can earn money. The income earned is mostly via recruitment.
Both are illegal.
Why Should You Hire a Lawyer for a Pyramid Scheme?
You should hire a lawyer to help you if you’re involved in a pyramid scheme. They will use their legal expertise to explore options to recover your losses and rescue your reputation.
Other ways in which a lawyer can help you includes:
- Helping you to report the pyramid scheme.
- Filing a civil lawsuit against the promoters or organizers.
- Protecting you and helping you to recover your losses.
- If you’re accused of running a pyramid scheme, your lawyer will build a strong defense for you.
Do you need a lawyer for a pyramid scheme?
Whether you’re a victim or you’ve been accused of a pyramid scheme, you need legal guidance. On ContractsCounsel, an online legal marketplace that connects clients with lawyers, vetted and professional lawyers are ready to assist you with your case and explore your options for recovering your losses.
