What is a pyramid scheme?

What is a pyramid scheme?

author: Sarah Neate

By Sarah Neate

Pyramid schemes are illegal business models that should be avoided at all costs. Being clued up will help you identify them and prevent others from being roped in.

What is a pyramid scheme?  

A pyramid scheme is a fraudulent and unsustainable business model. Theyre usually disguised as zero-risk way to make money fast. However, they are quite the opposite.  

The reason they’re called pyramid schemes’ is because it starts with a small amount of people at the top who recruit others to join their business below them. Those people would be expected to pay money upfront to ‘invest’ in the business. They would then be expected to follow suit by recruiting multiple new ‘investors’ below them, and so on.  

At each new level, more people are recruiting investors, which is how the pyramid continues to grow and how the people at the top continue to make money. The people lower down the chain often end up losing money. Sometimes hundreds of pounds - and they can be very difficult to get out of.  

Why are pyramid schemes illegal?    

The reason they're illegal is because they're fraudulent.  

The people running these businesses tend to disguise them as multi-level marketing companies. They do this by pretending to successfully sell products to large amounts of customers. However, these businesses don’t actually make money from selling products. They make money from the upfront fees people pay to join the company and by getting every new member to recruit other new members.  

Pyramid schemes are completely illegal and anyone who is involved in them is liable for prosecution. 

What is an example of a pyramid scheme?   

Imagine if you were offered the chance to make a lot of money, quickly, by selling a set of skincare products. All you had to do was purchase the products for £300, and recruit 3 new members 

In turn, those new members must do the sameWhen more people join, you’re promised a return on this investment. The more that people go along with the scheme, the more the chain-starter’s profits increase, however those at the bottom of the scheme will get little if nothing in return.  

How to spot a pyramid scheme  

Pyramid schemes can be difficult to spot. They’re often disguised to look like real business’ and can be structured similarly to other unfair legal business models.  

Some classic signs of a pyramid scheme include: 

  • promises that sounds too good to be true – Are they suggesting you could earn an unrealistic amount of money within a short space of time?
  • focus on new recruits rather than sales – if part of the deal is getting more people involved to make money then this is a definite red flag  
  • you have to make a purchase upfront – you should never have to pay out any money before you start earning money 
  • enticing language – ‘get rich quick’ or ‘life-changing opportunity’ are commonly used by those promoting pyramid schemes 
  • time pressures – if you’re being told that this is a ‘once in a lifetime’ opportunity, then again it’s a red flag.  

What to do if you spot a pyramid scheme 

If you spot a pyramid scheme, or youve accidentally become involved in one, you should report it to Action Fraud immediately 

In the meantime, you should break off contact with anyone involved in the scheme and be sure not to invest anymore of your money in it. If you've given out your bank details to anyone involved, then make sure to let your bank know as soon as possible.   

Be sure to keep any evidence you have such as written correspondence. 

To find out more about how to spot and avoid a social media scams read here.  

Disclaimer: We make every effort to ensure that content is correct at the time of publication. Please note that information published on this website does not constitute financial advice, and we aren’t responsible for the content of any external sites.

What is a pyramid scheme? What is a pyramid scheme?