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: A scheme offered membership costing $3,500 plus GST to an alleged 'concierge' service and access to a closed buyer group that claimed to receive discounts at various rates from a number of businesses. Members were also given the opportunity to earn significant remuneration by the recruitment of new members. We obtained an injunction against the scheme, which prevented further operation or promotion of the scheme and effectively froze any money in its bank account. The company and individuals involved were convicted and fined. In addition, the Court ordered repayment of membership fees to two witnesses from the frozen company bank account.

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