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What’s a Pyramid Scheme?

What’s a Pyramid Scheme?

A pyramid scheme is an illegal business model. It is important to understand all aspects of a pyramid scheme, as it is can end up costing you a lot of money. Read more to find out about what a pyramid scheme is.

23rd August 2019

A pyramid scheme is an illegal business model which makes money by recruiting members. You’ve probably already encountered one, whether you’ve meant to or not. Generally, a pyramid scheme is a sketchy business which promises ‘get rich quick’, or ‘lose weight quick’ plans. It focuses on recruiting members in to the business rather than sale of products or goods. It is called a pyramid scheme, because each member recruits a number of members on the level below them.

If you believe you have been offered to join a pyramid scheme, it is important to understand that they are expressly prohibited by law. Additionally, lower-level employees rarely ever profit from pyramid schemes, and are heavily exploited by this business model.

In order to avoid being recruited by a pyramid scheme, use our guide to see what the usual tell-tale signs of a pyramid scheme are!

1. Recruitment Process

Generally, the usual process in which an individual is recruited into a pyramid scheme is through friends, family or peers. These people will offer them opportunities to make cash quick, or other schemes that seem too good to be true.

The main building block of pyramid schemes is recruitment of members. In seminars held by pyramid schemes, it will usually inform members that the most important part of their job is to recruit others. Also, part of the recruitment process will require the new ‘employee’ to pay large up-front costs to the business.

Another tell-tale factor of a pyramid scheme is that you aren’t selling to the general public, but rather you are signing up people first and then selling them the goods afterwards.

2. Inventory Loading

Additionally, pyramid scheme ‘employees’ will have to sell the business’ goods. The most common examples are generic beauty or medicinal products (that most of the time, have not been approved by the TGA). Most often than not, no actual product or service is being provided by the business.  

On top of this, employees will have to buy lots of stock from the business. Either this stock will have a suspiciously fast expiration date or be of very little value. Their job, once they have bought this, is to sell it off to other customers and sign them up as well. This process is called ‘inventory-loading’.

An example of inventory loading is:

Annie buys the recommended amount of $4000 worth of information pamphlets from a business. She is told that she will make this money back by selling it off to other people, and signing them up.

However, at this point, Annie will most likely be unable to sell of this high amount of information pamphlets. The scheme she is part of has no interest in knowing if she ever sells them. This is because they have already made $4000 from her and will not help Annie make profit or make the money back. Most pyramid schemes advertise a ‘buy more/sell more’ policy to their employees, knowing they will most likely experience financial difficulty.

3. Pyramid Scheme Information

Most pyramid schemes will begin with you not knowing exactly how you will profit, or how much it will cost to be an employee. They will rope you into the scheme by advertising it as a lifestyle business. The main pieces of information an individual is given is that they will be able to work on your own schedule, and and they can be their own boss.

In conclusion, a pyramid scheme is a system of making money through recruiting people. It is crucial that you understand that it is a fraudulent business model. It offers no real monetary profit to anyone apart from those on the highest level of the pyramid. If you think that you have entered a pyramid scheme, or would like further information, you can contact a business lawyer.

Don’t know where to start? Contact us on 1800 529 728 to learn more about customising legal documents and obtaining a fixed-fee quote from Australia’s largest lawyer marketplace.

Author
Natalie Ho

Natalie Ho is a legal tech intern at Lawpath, working as part of the Content Team. She is in her 2nd year at Macquarie University studying a double degree of Science and Law and is highly passionate about the accessibility of law.