Pyramid Scams: High on your list of Scam Spotting
Pyramid selling schemes are illegal in most jurisdictions. It’s not by selling goods and services that these make money. Rather, they make money by recruiting people. The unmitigated rapscallions running these schemes, as a rule, misguide investors about possible outcomes. There’s every reason Pyramid scams ought to be high on your list of scamspotting.
Pyramid scheme: the quintessence of scamming
A pyramid scheme can assume diverse forms but has the following basic elements: it offers a financial return based on payments made by recruits; the return is contingent mainly upon the nonstop recruitment of new members, not sales of a product or service.
Pyramid selling schemes may offer ‘gimmick’ products (for example, certificates) or vulgarly overpriced products or services that have little or no resale value and are least likely to be purchased again (for instance, general financial information or personal development programmes).
Pyramid schemes are of diverse kinds, and the structure may not look like a classic pyramid shape. However, you must not think a scheme is not a pyramid scheme because any promotional diagram or image looks totally unlike a triangle.
Pyramid scams on social media
Consumers should be suspicious of offers on social media that sound too good to be true. Social media provides a platform for wide-ranging promotion.
Differentiating multi-level marketing schemes from pyramid scams
Few multi-level marketing schemes are operating globally that are dissimilar to pyramid selling schemes. With multi-level marketing schemes, salespeople have to sell products straight to consumers. They are separately induced to recruit others as fellow salespeople. Sharers earn commission from selling products, whereas pyramid selling is concerned with solely earning money or mainly inducing other investors into the scheme. In a multi-level marketing scheme, income expectation is restricted by the number of sales, not by the quantum of fresh sales representatives. Customers of multi-level marketing companies can purchase the goods or services they offer without having to join the scheme. Multi-level marketing also involves usually commercially viable products (for example, jewellery, clothing, cosmetics, health products, cleaning products and cookware), which stand for genuine business and income-earning opportunities through sales to clients. Multi-level marketing schemes are not prohibited as per the Fair Trading Act. Nevertheless, pyramid schemes promoters do try and make their plans sound legit. Therefore you should always check a scheme with great attention to ascertain that it is actually a multi-level marketing scheme, rather than an illegal pyramid selling plan.
Deceitful claims about possible earnings
Fair trading practices Acts generally prohibit any materials that magnify fantastically the earnings participants are likely to obtain from their engagement with business activity. Relevant governmental agencies have had to investigate claims of fantastic earnings with both pyramids selling schemes and legitimate business activities. Citizens need to be wary of joining schemes where the promotional materials contain testimonials of high earnings from people who are very difficult to identify (for instance, “Since I joined this scheme I have made $100,000 without really trying,” RS of Waterloo).
Chain letters: are they pyramid scams?
Yes, chain letters requesting the sending of money, goods, or services come under the definition of pyramid schemes and are illegal.
Forfeits invited by promotion/operation of a pyramid scam
Only judicial courts can have a holding regarding transgressions of fair trading practices Acts. Courts can penalise individuals and companies to the tune of hundreds of thousands of dollars for each infraction if they are culpable of breaching Act provisions relating especially to pyramid schemes.
Compendium pyramid scams: checking out a pyramid scheme
The following guide may help in ascertaining the nature and lawfulness of a marketing scheme. If doubts nag you, you should seek legal advice before joining or participating in a scheme.
- Is there a signing up fee?
Pyramid selling schemes frequently have start-up fees that are not reimbursed for purchasing commercially viable goods or services because most earnings introduce others to the scheme.
- Does the prospectus indicate fantastic earnings (for instance, “make $100,000 a month legally”)?
Promoters making fantastic claims risk breaking the law.
You have to seek expert consultation if the answer is yes to either of the above questions.
- Do participants realise commissions mainly from selling products or services, or are financial bonanzas largely contingent upon recruiting others into the scheme?
Pyramid schemes mainly centre on creating rewards for those members who recruit others.
- Do the products proffer a real income-earning opportunity through sales?
A legitimate scheme has products for which a ready market exists.
- Is the number of products that have to be purchased or ordered by the participants commercially pragmatic?
Legitimate businesses demand that participants buy/ order only as much stock as they can positively expect to sell.
- Does the prospectus offer boons such as “it’s easy to sign up new distributors” or“a life of happiness and prosperity”?
Such statements have to be read with attention as they may make fantastic promises which hide the amount of hard work and risk associated with realising such goals.
- Does the prospectus contain testimonials from people who are hard to identify (for instance, “RS of Waterloo writes…”)?
People giving testimonials may not wish to be identified for rationales of privacy. However, indistinguishability may raise suspicions about whether the testimonials are bona fide. Even if they are, there is usually no way for consumers to check. Therefore, references to testimonials should be read with this caveat in mind.
- Does the prospectus contain avowals such as “this scheme is legal” or “this is not a get rich scheme”?
Statements like this have to be read with a pinch of salt. First, you have to ask yourself why such a statement is necessary at all. They may be meant to disguise the fact that the scheme may be illegal or contain illegal constituents.
- Does the literature indicate the Commerce Commission or another government department or agency has endorsed the scheme?
No governmental institution/agency advocates or approves any such scheme. Therefore, if this statement is made, it is patently untrue.
- Does the prospectus fail to share a street address so that you are unable to contact a person for further details?
Legitimate schemes are generally painless to contact in person.
- Does the scheme offer ongoing training and sales support?
Legitimate multi-level marketing businesses have an entrenched interest in guaranteeing that participants are well trained and supported.
There are a number of commonsensical approaches that could keep you safe from being drawn into pyramid scams. Rather than acting on hearsay, you ought to go for independent advice. You should fight shy of schemes that give assurance of a guaranteed income. Take into consideration always if the products on whose basis the schemes ‘runs’ are real o not. Be aware of pyramid schemes. When your innocent family and friends’ circle try to persuade you to join them in investing in a pyramid scheme, they might be clueless as to the scheme’s shady nature. Enlighten yourself, enlighten others.