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:
- the relationship between participation payments and the value of the products and services offered under the scheme
- the emphasis placed on the entitlements of participants in promotional material.
The law does not limit the matters a court can consider.