Ponzi vs. pyramid schemes: What’s the difference?

A pyramid scheme is a dishonest investment plan that lures people with claims of large profits, usually by recruiting new participants. 

Individuals involved in a pyramid scheme are required to make an initial financial investment, and rather than engaging in genuine product or service sales, their primary emphasis is on convincing others to become part of the scheme. A hierarchical pyramid structure is created by the new recruits’ responsibility to bring on new recruits, who will bring on more participants. Early participants frequently receive payments for their profits from later investors, giving the appearance of prosperity.

As it gets harder to find new partners to support the ever-expanding pyramid, pyramid schemes are unsustainable and doomed to fail. Those at the top profit when they eventually collapse, usually at the expense of those lower down the hierarchy who lose their investments. Due to their exploitative character and the harm they inflict on innocent people who fall prey to them, pyramid schemes are prohibited in many countries.

Pyramid schemes opt for the same model as multi-level marketing (MLM). However, MLM participants can make commissions from both the sale of these products and from recruiting new members. In contrast, legitimate products or services are frequently absent from pyramid schemes, and the main emphasis is on recruiting participants without offering real value.

The Telexfree case is an example of a pyramid scheme in the financial industry. While Telexfree, which ran from 2012 to 2014, purported to provide internet phone services, its main objective was participant recruitment. Investors were promised hefty profits in exchange for placing internet ads and recruiting new members. Thousands of people were duped before the scheme finally failed.