What is the definition of a "Pyramid" scheme?

And what is the penalty for participating in one?

Here's a definition from the FBI page on common fraud schemes:
http://www.fbi.gov/majcases/fraud/fraudschemes.htm

Pyramid Scheme

Pyramid schemes, also referred to as franchise fraud, or chain referral schemes, are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses. At the heart of each pyramid scheme there is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment. Promoters fail to tell prospective participants that this is mathematically impossible for everyone to do, since some participants drop out, while others recoup their original investments and then drop out.

Some Tips to Avoid Pyramid Schemes:

Be wary of "opportunities" to invest your money in franchises or investments that require you to bring in subsequent investors to increase your profit or recoup your initial investment.
Independently verify the legitimacy of any franchise or investment before you invest.

Similar scheme is the Ponzi scam;

What is a "Ponzi" Scheme?

A Ponzi scheme is essentially an investment fraud wherein the operator promises high financial returns or dividends that are not available through traditional investments. Instead of investing victims' funds, the operator pays "dividends" to initial investors using the principle amounts "invested" by subsequent investors. The scheme generally falls apart when the operator flees with all of the proceeds, or when a sufficient number of new investors cannot be found to allow the continued payment of "dividends."

This type of scheme is named after Charles Ponzi of Boston, Massachusetts, who operated an extremely attractive investment scheme in which he guaranteed investors a 50 percent return on their investment in postal coupons. Although he was able to pay his initial investors, the scheme dissolved when he was unable to pay investors who entered the scheme later.

Some Tips to Avoid Ponzi Schemes:

As with all investments, exercise due diligence in selecting investments and the people with whom you invest.
Make sure you fully understand the investment before you invest your money.

Amway.

Penalty? You lose your time, and make other people money while you do all the work.

It is a business model that relies on the guillibility of its participants and is usually short lived. Benefits the person at the "top of the pyramid the most". There is usually no penalty for participating in one but there is a high penalty for starting one.

The legal definition of a pyramid scheme is (1) proceeds from the later lenders are used to repay former lenders, and (2) borrowing serves no business purpose.

The punishment... Well, it's up tp the judge. Pyramid scheme is a fraud and is punished as such.

A pyramid scheme is the concept of Multi-Level-Marketing where you leverage your network of friends, family, colleagues, etc to sell products and services for a commission on each sale and as the chain grows you make more money/ commission. If you are the apex then the agents you bring into the plan are under you and over time your chain would resemble a giant pyramid.
It began with Avon and has now evolved into Amway, et-al which are thriving in a networked world.

There are plenty of LEGAL pyramid schemes. Actually, most corporations fall into this category.

I may not have the answer you are looking for, but if you are referring this question to direct sales & marketing, you shouldn't. Alot of people turn their noses up at network marketing. They think it is a scam and a joke, noone takes it seriously. If you stop and think about it everything is a "Pyramis Scheme" A job at a bank, or a lawyers office, the supermarket. There is always always gonna be somebody at the very bottom and someone at the very top. The cashier keeps the shift manager in a job, the shift manager keeps the manager in a job, the manager keeps the GM in a job, the GM keeps the distrct manager in a job so on & so on down the line.... Anyways, I said all that to say this, if you are thinking of a career in network marketing, GO FOR IT. You'll only get out of it what you put into it. Hope I've helped.

1)Rev Sun Yun Mooney
2) Communism in Cuba
3) Communism in Venezuela
4) Communism in China

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