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What is a Pyramid Scheme?

The pyramid scheme a unsustainable business model where the original investors earn money by enlisting others , rather than selling actual goods or products. The scheme is based on asking new investors to pay an initial payment before they are allowed to be a part of the scheme. The money that is received from new members is used to pay the first investors. They are given a guaranteed income if they're successful in bringing more people into the program.

While the idea of pyramid schemes may sound straightforward, they are typically given to the investors under a deceitful manner. It is therefore essential to be aware of the way it operates, and also the many types it may take.

How Pyramid Schemes Work

Like its name implies the plan follows the form of the pyramid. It begins with one person known as the original recruiter who is at the top of the pyramid. The recruiter recruits one person who must make an investment of a specific quantity of funds. The upfront investment is given to the person who recruited you. To allow an individual recruiter to recoup the investment, he has to find more members to join him which will also pay an investment upfront.

If the person who is recruiting manages to persuade at least 10 people to sign up the organization, he'd have earned significant profits with a tiny investment.

Each of the newly hired members will need to recruit more to join. For every 10 new members someone joins they earn an impressive profit, less the initial payment made to the person who referred him.

The process continues to the point that the program is no longer able to sustain itself. As a result the people at the highest levels in the ladder have made massive profits, and those at the bottom are left with a loss of their money.

The issue is that a program like this is not able to last for a prolonged period of. There is only a limited number of members who are eligible to join. Participants are misled to believe that by investing they will earn a large amount of money. In fact, the program hasn't always led to the creation of wealth, nor has the organizers of the scheme purchased any assets.

Forms of Pyramid Schemes1. Multi-level Marketing (MLM)

As opposed to other scheme, pyramids are not the same. Multi-level Marketing (MLM) is actually a legal business practice. The practice involves recruiting new members in order to assist in selling the product or service that is valuable. The person who recruits them earns a profit by selling the productor service, and is not required to recruit additional members.

So, the primary distinction between the other pyramid schemes as well as multi-level sales is that the former offers an authentic solution or product, whereas the former does not.

However there is an alternative to MLM that is the MLM pyramid scheme. This means that the variation involves selling services or products that have very little or nothing of worth. For instance, it could be selling printed material for example, such as investment courses. This kind of scheme can be capable of sustaining itself by luring people to purchase the products that aren't worth their money at high cost.

2. Promotions for gifts

Some schemes are disguised as gifts promotions. They are usually found in investment companies. The way they operate is that the person who recruits is presented with an incentive. If the person who is recruited succeeds in attracting more members to join, the recruiter also receives a present from the people he has recruited. These schemes are usually associated with club activities and are considered illegal.

Attributes of a Pyramid Scheme

Pyramid schemes share a few typical characteristics that one must be aware of. They include:

1. Focus is on recruitment

If you're a part of a program insisting heavily on attracting members to join, instead of selling products or services the chances are it's illegal.

2. No actual sale of product or service.

Be very careful regarding schemes that do not involve selling any real items or products. Fraudsters often develop products with a fancy sounding name in order to fool consumers.

3. The promise of high returns in a the shortest amount of period of time

If someone is given a chance to make fast money in a short period of time one should be wary of such programs. The only way in which a plan could generate quick cash is if the money from new participants are utilized to pay back early investors.

4. There is no proof of the revenue generated from sales at retail

Before signing up to any scheme, you should be sure to request proof of income. For instance, they could request the financials of their company that should be examined by a qualified CPA. These records will indicate the type of activities that the business is engaged in. In general the scheme must be generating revenue mostly through the sale of goods or services, rather than the recruitment of individuals.

Summary

The pyramid scheme can be described as a fraud which is based on a non-sustainable business model. It is a method of obtaining people to join an investment scheme by paying cost. They then have to recruit more people to sign up so that they can make a profit from their investment as well as earn a profit.

The process of recruiting continues until the cycle becomes no longer able to last. At the point that the system disintegrates, the early members (those at the highest levels of the ladder) will have earned substantial profit, while recent participants will have lost on their investments.

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