Pyramid Scheme: How does it work and why you should avoid it?

How does the Pyramid scheme work?

The Pyramid scheme is a marketing strategy that is primarily based on recruiting new members as distributors of the company and promising them high return commission in exchange for encouraging other people to join, too. They use high profile individuals to advertise their company or products and also as a way to enlist more people into joining.

The whole system of a bogus pyramid scheme is designed to benefit most of the higher personnel of the company and those people who were recruited much earlier. Their target market is financially desperate people and they use misleading, exaggerated marketing claims to recruit them, which includes an unlikely huge amount of income, a sports car, and extravagant travel opportunities.

Upon joining, the recruits are asked to pay for a membership fee that comes with discounted products either to sell or for personal use. The products, however, are usually overpriced for the non-members and have no market or consumer value.

Most of the time, companies with bogus pyramid schemes do not have actual products in the first place. New members will then turn to recruit rather than sell also because the companies made it sound easy to recruit like it’s just a snap of a finger. Aside from the absence of products, the commission that they could get from successful recruits is a huge profit, as what they are promised.

Pyramid Scheme and MLM

The pyramid scheme is usually correlated to MLM or multi-level marketing which is also a marketing strategy that involves selling products/services to people. It is also called pyramid selling, network marketing or referral marketing. Both strategies are on the same models of business which is having multiple levels of distributors and recruits.

The only difference between pyramid schemes and MLM is that the latter has actual products that they distribute to consumers. MLM business ventures operate as a pyramid scheme that sells investment products and for them to operate, they will need security license from the Securities and Exchange Commission or SEC.

Pyramid Scheme vs. Ponzi scheme

Aside from pyramid schemes, Ponzi schemes have a similar ploy playing as an investment scheme where they promise high returns with less risk to investors.

It generates returns by acquiring new investors. These types of schemes offer continuous profits as the number of investors increase.

Both schemes are self-sustaining, as long as the cash flow is consistent. The difference is the way they will execute as to how the money will circulate or the type of products they offer.

Ponzi Scheme in the Philippines

Last June 2019, a religious corporation in the Philippines, Kapa-Community Ministry International, Inc. or KAPA had an awful taste of justice as they face criminal complaints by the Securities and Exchanges Commission or SEC for financial exploitation, making it presently the largest investment scam in Philippine history.

They were found operating a Ponzi scheme, where they asked the public to make “donations” as investments and promised returns which they called “love gift” or blessings, which is equivalent to 30% of the donations to be paid out every month for life.

KAPA was soliciting investments without a license from the SEC and violated the Securities Regulation Code. The Court of Appeals then issued a Freeze Order on bank accounts and other assets that are linked to them.

Avoiding Pyramid Schemes

These kinds of schemes did not immediately pop out and gain massive investors by itself as many financially-desperate individuals were already deceived by these deceptive ploys because of their exaggerated claims.

But how can one avoid joining a pyramid scheme? Start by learning about them, be familiarized with how they work including how to spot a pyramid scheme. It is one way to avoid being sucked by corporations that will not only milk people their hard-earned money but will ruin their lives forever.

We can say that the authority has already made a move in preventing these kinds of schemes to propagate throughout the country. For instance, with the Kapa-Community case, the SEC filed a criminal complaint against them when they found out that it is leading a scam, making it exposed and vulnerable.

Accordingly, for a more thorough assessment of the complaint, the Department of Justice or DOJ conducted a preliminary investigation on Kapa, digging into them and taking action before the corporation could do any worse to the public.