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Pyramid Schemes

Oct. 9, 2013

In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.

The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money. The chart below shows how pyramid schemes can become impossible to sustain:

Pyramid. Level 1: 6 participants. Level 2: 36 participants. Level 3: 216 participants. Level 4: 1,296 participants. Level 5: 7,776 participants. Level 6: 46,656 participants. Level 7: 279,936 participants. Level 8: 1,679,616 participants. Level 9: 10,077,696 participants. Level 10: 60,466,176 participants. Level 11: 362,797,056 participants, more than the U.S. Population. Level 12: 2,176,782,336 participants. Level 13: 13,060,694,016 participants, more than the World Population.

For more information about pyramid schemes and fraudulent multi-level marketing programs, please read Beware of Pyramid Schemes Posing as Multi-Level Marketing Programs.

The Office of Investor Education and Advocacy has provided this information as a service to investors.  It is neither a legal interpretation nor a statement of SEC policy.  If you have questions concerning the meaning or application of a particular law or rule, please consult with an attorney who specializes in securities law.

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