What is a pyramid scheme?

A pyramid scheme can take many forms, but has the following essential elements:

  • it offers a financial return based on the payments made by new recruits
  • the return is dependent primarily on the continued recruitment of new members, not sales of a product or service.

Pyramid selling schemes may involve 'gimmick' products (for example certificates) or overpriced products or services that have little or no resale value and are not likely to be purchased again (for example personal development programmes or general financial information).

Example: Three businessmen promoted a ‘get rich quick’ scheme. Prospective members were told that the potential return was “huge” – at least US$10,000 in 90 days, with a “minimum potential income” of US$160,000. This as a pyramid scheme as the only way members could make money was by recruiting new participants. If no new members were recruited, no money was made. Three people that promoted the scheme were convicted, fined and ordered to pay reparation to their victims.

Why they cause problems

Because the potential reward offered depends on the recruitment of new people to pay into the scheme, many participants will always be at or near the base of the pyramid and will not achieve the promised return on their 'investment'.

Only the few initial participants at the top of the pyramid are likely to make money, since the number of possible new recruits in any community is limited.

Read more about pyramid schemes including what to look for PDF (411 KB)