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← How to spot a pyramid scheme - Stacie Bosley

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Showing Revision 4 created 01/31/2020 by lauren mcalpine .

  1. In 2004,
  2. a new company called Vemma Nutrition
  3. started offering a life-changing
  4. to earn full time income
    for part time work.
  5. Vemma’s offer was open to everybody,
  6. regardless of prior experience
    or education.
  7. There were only two steps to start
    get started earning:
  8. purchase a $500-600 kit
    of their liquid nutrition products,
  9. and recruit two more members
    to do the same.
  10. Vemma Nutrition Company grew quickly,

  11. becoming a global operation
  12. that brought in 30,000 new members
    per month at its peak.
  13. There was just one problem—
  14. while the company generated $200 million
    of annual revenue by 2013,
  15. the vast majority of participants
    earned less than they paid in.
  16. Vemma was eventually charged with
    operating a pyramid scheme:

  17. a common type of fraud
  18. where members make money
  19. by recruiting more people to buy in.
  20. Typically, the founder solicits an initial
    group of people

  21. to buy in and promote the scheme.
  22. They are then encouraged to recruit others
  23. and promised part of the money
    those people invest,
  24. while the founder also takes a share.
  25. The pattern repeats for each group
    of new participants,
  26. with money from recent arrivals funneled
    to those who recruited them.
  27. This differs from a Ponzi scheme,
  28. where the founders recruit new members
  29. and secretly use their fees to
    pay existing members,
  30. who think the payments come
    from a legitimate investment.
  31. As a pyramid scheme grows,

  32. it becomes increasingly difficult for new
    recruits to make money.
  33. That’s because the number of participants
    expands exponentially.
  34. Take a structure where each person has
    to recruit six more to earn a profit.
  35. The founder recruits six people to start,
  36. and each of them recruits six more.
  37. There are 36 people in that second
    round of recruits,
  38. who then each recruit 6 people—
  39. a total of 216 new recruits.
  40. By the twelfth round of recruiting,
  41. the 2.1 billion newest members
    would have to recruit
  42. over 13 billion more people total
    to make money–
  43. more than the entire world population.
  44. In this scenario,
  45. the most recent recruits,
  46. over 80% of the scheme’s participants,
  47. lose all the money they paid in.
  48. And in real life,
  49. many earlier joiners lose out too.
  50. Pyramid schemes are illegal
    in most countries,

  51. but they can be difficult to detect.
  52. They are presented as many
    different things,
  53. including gifting groups,
  54. investment clubs, and multi-level
    marketing businesses.
  55. The distinction between pyramid schemes
    and legitimate multi-level marketing
  56. can be particularly hazy.
  57. In theory, the difference is that
  58. the members of the multi-level
    marketing companies
  59. primarily earn compensation from selling
    a particular product or a service
  60. to retail customers,
  61. while pyramid schemes primarily compensate
    members for recruitment of new sellers.
  62. In practice, though,
  63. many multi-level marketing companies make
    it all but impossible
  64. for members to profit purely
    through sales.
  65. And many pyramid schemes,
    like Vemma Nutrition,
  66. disguise themselves as legal multi-level
    marketing businesses,
  67. using a product or service to hide the
    pay-and-recruit structure.
  68. Many pyramid schemes also capitalize
    on already existing trust within churches,

  69. immigrant communities,
    or other tightly knit groups.
  70. The first few members are encouraged
    to report a good experience
  71. before they actually start
    making a profit.
  72. Others in their network follow
    their example,
  73. and the schemes balloon in size
  74. before it comes clear that most members
    aren’t actually profiting.
  75. Often, the victims are
    embarrassed into silence.
  76. Pyramid schemes entice people with the
    promise of opportunity and empowerment.
  77. So when members don’t end up making money,
  78. they can blame themselves
    rather than the scheme,
  79. thinking they weren’t tenacious enough
    to earn the returns promised.
  80. Some victims keep trying,
  81. investing in multiple schemes,
  82. and losing money each time.
  83. In spite of all these factors,

  84. there are ways to spot a pyramid scheme.
  85. Time pressure is one red flag—
  86. be wary of directives to “act now or
    miss a once-in-a-lifetime opportunity.”
  87. Promises of large, life-altering
    amounts of income are also suspect.
  88. And finally, a legitimate multi-level
    marketing business
  89. shouldn’t require members to pay for the
    opportunity to sell a product or service.
  90. Pyramid schemes can be incredibly
    destructive to individuals,

  91. communities, and even entire countries.
  92. But you can fight fire with fire
  93. by sending this video to three
    people you know,
  94. and encouraging them to do the same.