In a pyramid scheme, participants hope to reap financial rewards well in excess of their investment
based primarily on the fees paid by members of their "downlines." Downline members pay these fees
to join the scheme and meet certain prerequisites for obtaining the monetary and other rewards offered
by the program. A participant, therefore, can only reap rewards by obtaining a portion of the fees paid by
those who join the scheme later. The people who join later, in turn, pay their fees in the hope of
profiting from payments of those who enter the scheme after they do. In this way, a pyramid scheme
simply transfers monies from losers to winners. For each person who substantially profits from the
scheme, there must be many more losing all, or a portion, of their investment to fund those winnings.
Absent sufficient sales of goods and services, the profits in such a system hinge on nothing more than
recruitment of new participants (i.e., fee payers) into the system.
The Commission's recent cases, however, demonstrate that the sale of goods and service; alone does
not necessarily render a multi-level system legitimate. Modem pyramid schemes generally do not
blatantly base commissions on the outright payment of fees, but instead try to disguise these payments
to appear as if they are based on the sale of goods or services. The most common means employed to
achieve this goal is to require a certain level of monthly purchases to qualify for commissions. While
the sale of goods and services nominally generates all commissions in a system primarily funded by
such purchases, in fact, those commissions are funded by purchases made to obtain the right to
participate in the scheme. Each individual who profits, therefore, does so primarily from the payments
of others who are themselves making payments in order to obtain their own profit. As discussed
above, such a plan is little more than a transfer scheme, dooming the vast majority of participants to
financial failure.
1 A participant’s downline usually consists of the people the participant recruits to join the
program as well as the people her recruits recruit, and so on through a predetermined number of
levels.
2 It is important to distinguish an illegal pyramid scheme from a legitimate buyers club. A
buyers club confers the right to purchase goods and services at a discount. If a buyers club is
organized as a multi-level reward system, the purchase of goods and services by one’s downline
could defray the cost of one’s own purchases (i.e., the greater the downline purchases, the greater
the volume discounts that the club receives from its suppliers, the greater the discount that can be
apportioned to participants through the multi-level system). The purchase of goods and services
within such a system can, therefore, be distinguished from a pyramid scheme on two grounds.
First, purchases by the club's members can actually reduce costs for everyone (the goal of the
club in the first place). Second, the purchase of goods and services is not merely incidental to the
right to participate in a money-making venture, but rather the very reason participants join the
program. Therefore, the plan does not simply transfer money from winners to losers, having the
majority of participants with financia11osses.
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