How To Tell If A Business Is A Pyramid Scheme

The whole point of pyramid scheme businesses is to scam investors of their money (via Investopedia). For instance, there was Bernie Madoff's ponzi scheme that was exposed in 2008. These businesses are presented as a form of network marketing business (via The Balance Small Business), where people make money only by bringing more people on board, per Investor.gov. It's a pretty simple networking chain. You pay an initial fee with the promise of making at least twice your investment when you get others to register or invest in the scheme as well.

Like a pyramid, the people recruited in the scheme occupy the top position while new members form the base. As new participants are recruited, the pyramid gets wider. According to Investor.gov, a business built on a model like this is bound to fail at some point because it'll become difficult to fill the base of the pyramid. So when the last set of recruits can't find new people to join the scheme, it all crashes and those at the bottom of the pyramid lose their money, per Consumer Rights. That's not something anyone wants to fall prey to, which is why it may be helpful to know how to spot a pyramid scheme as soon as anyone tries to talk you into one.

If you aren't going to fall victim to pyramid scheme businesses, then you'll need to find ways to recognize them. Here's a good place to start: legit networking or multi-level marketing businesses involve sales of actual products, while pyramid scheme businesses don't, per Live Sorted. Andrew Lelling, an attorney in Massachusetts, told CNBC: "There are legitimate multi-level marketing companies. The difference is that a legitimate company makes its revenue from the actual sale of a product. A pyramid scheme does not."

In cases where actual products are presented, pay attention to their marketing strategy. If they are more concerned about recruitment networks than they are about promoting their products to attract more buyers, they are likely one of the pyramid scheme businesses you should run away from (via The Balance Small Business.)

Pyramid schemes are also known to promise offers that sound way too good to be true, per Job List. Bruce Dorris, president of the Association of Certified Fraud Examiners, said, ​​"Any time that you have a direct solicitation from someone, 'Hey, look, you can come in. You can work from your house. You can make this amount of money and if you can get some other people to work for you from their homes, you'll make even more money,' that's a huge red flag to walk away" (via CNBC). Remember: if it sounds too good to be true, it probably is.