Pyramid schemes

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Pyramid schemes make money by recruiting businesses or people rather than by selling real and legitimate products or services – even if a product or service is involved. These schemes inevitably collapse and new members can lose a lot of money.

In a pyramid scheme, participants are often asked to make payments. The two payments often associated with a pyramid scheme are a:

  • participation payment to join
  • recruitment payment, promised when a member recruits others.

The recruitment payment helps define a pyramid scheme—it must be the only, or main reason, a member joins.

The 'payments' could be a financial or a non-financial benefit, given either to the new participant or to someone else.

It is illegal for any business or person to participate in, or induce others to participate in a pyramid scheme. Participation in a pyramid scheme includes establishing or promoting the scheme or just taking part in the scheme. Criminal and civil penalties apply.

A court must consider two factors when identifying a pyramid scheme:

  1. the relationship between participation payments and the value of the products and services offered under the scheme 
  2. the emphasis placed on the entitlements of participants in promotional material.

The law does not limit the matters a court can consider.

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