Ponzi and Pyramid Schemes: Warning Signs

Ponzi and pyramid schemes are some of the most damaging financial scams. They often look like business opportunities or investment plans and spread through friends and family.

What is a Ponzi scheme?

A Ponzi scheme pays "profits" to earlier investors using money from new investors. There is no real business earning those profits. When new money slows down, the scheme collapses and most people lose their money.

What is a pyramid scheme?

A pyramid scheme pays people mainly for recruiting others who pay to join. The focus is on recruitment, not on selling real products to real customers. Because recruitment cannot grow forever, most participants lose.

Warning signs

• Guaranteed high returns with little or no risk.
• Income mainly from recruiting people, not from selling products.
• Pressure to join quickly or "before it closes".
• Complex explanations of how profits are made.
• Difficulty withdrawing money or new conditions for withdrawals.
• Rewards for building "levels" or "chains" under you.

Legitimate businesses are different

Real affiliate and reseller programs pay for verified sales of real products to real customers. You earn when a customer buys something they want, not because someone else paid a joining fee.

Protect yourself

Ask where the money comes from. If the answer is new members, walk away. Do not invite friends to anything you have not fully understood.

Frequently asked questions

How is affiliate marketing different from a pyramid scheme?

Affiliate marketing pays for verified sales of real products to real customers. Pyramid schemes pay mainly for recruiting people who pay to join.

Why do Ponzi schemes always collapse?

They depend on new money to pay earlier members. When new money slows, they cannot pay and collapse.