So what are these pyramid schemes? Presented as business opportunities, pyramid schemes require participants to pay an initial fee to become involved. In return, they are promised large commissions for recruiting new members to the operation. Each person they recruit must bring in a certain number of new people, and for each recruit, the original recruit receives a payment. As each new level of recruits is added on, the structure takes on the shape of a pyramid.
The premise usually involves the sale of a product, but unlike legitimate organizations, companies or individuals engaged in pyramid schemes do not sell their products to the general public. Rather, when sales do take place – and they don’t always – the products are sold off to other members of the pyramid scheme, who are often required to buy large amounts of inventory.
In an environmentally-friendly pyramid scheme, a Texas-based company called BioPerformance claimed to have developed pills and powders that would increase gas mileage and fuel efficiency. The founders touted their products at seminars across the country, offering people the chance to become dealers for a startup cost of hundreds of dollars. Rather than selling the product, however, participants were told that they would get paid simply to tell others about the miracle gas pill. Ironically, the “top secret” ingredient in the pills and powders was the equivalent of moth balls, which is not only harmful to humans, but also decreases a car’s engine performance.
Sidebar: Pyramid schemes should be distinguished from multilevel marketing, which is not illegal and does involve selling a specified product to the public. In multilevel marketing enterprises, sellers receive payment for product sales and not for the recruitment of new salespeople.