How to spot a pyramid scheme - Stacie Bosley

In 2004,

a new company called Vemma Nutrition

started offering a life-changing
opportunity

to earn full time income
for part time work.

Vemma’s offer was open to everybody,

regardless of prior experience
or education.

There were only two steps to start
get started earning:

purchase a $500-600 starter kit
of their liquid nutrition products,

and recruit two more members
to do the same.

Vemma Nutrition Company grew quickly,

becoming a global operation

that brought in 30,000 new members
per month at its peak.

There was just one problem—

while the company generated $200 million
of annual revenue by 2013,

the vast majority of participants
earned less than they paid in.

Vemma was eventually charged with
operating a pyramid scheme:

a common type of fraud

where members make money

by recruiting more people to buy in.

Typically, the founder solicits an initial
group of people

to buy in and promote the scheme.

They are then encouraged to recruit others

and promised part of the money
those people invest,

while the founder also takes a share.

The pattern repeats for each group
of new participants,

with money from recent arrivals funneled
to those who recruited them.

This differs from a Ponzi scheme,

where the founders recruit new members

and secretly use their fees to
pay existing members,

who think the payments come
from a legitimate investment.

As a pyramid scheme grows,

it becomes increasingly difficult for new
recruits to make money.

That’s because the number of participants
expands exponentially.

Take a structure where each person has
to recruit six more to earn a profit.

The founder recruits six people to start,

and each of them recruits six more.

There are 36 people in that second
round of recruits,

who then each recruit 6 people—

a total of 216 new recruits.

By the twelfth round of recruiting,

the nearly 2.2 billion newest members
would have to recruit

over 13 billion more people total
to make money–

more than the entire world population.

In this scenario,

the most recent recruits,

over 80% of the scheme’s participants,

lose all the money they paid in.

And in real life,

many earlier joiners lose out too.

Pyramid schemes are illegal
in most countries,

but they can be difficult to detect.

They are presented as many
different things,

including gifting groups,

investment clubs, and multi-level
marketing businesses.

The distinction between pyramid schemes
and legitimate multi-level marketing

can be particularly hazy.

In theory, the difference is that members
of multi-level marketing companies

primarily earn compensation from selling
a particular product or a service

to retail customers,

while pyramid schemes primarily compensate
members for recruitment of new sellers.

In practice, though,

many multi-level marketing companies make
it all but impossible

for members to profit purely
through sales.

And many pyramid schemes,
like Vemma Nutrition,

disguise themselves as legal multi-level
marketing businesses,

using a product or service to hide the
pay-and-recruit structure.

Many pyramid schemes also capitalize
on already existing trust within churches,

immigrant communities,
or other tightly knit groups.

The first few members are encouraged
to report a good experience

before they actually start
making a profit.

Others in their network follow
their example,

and the schemes balloon in size

before it comes clear that most members
aren’t actually profiting.

Often, the victims are
embarrassed into silence.

Pyramid schemes entice people with the
promise of opportunity and empowerment.

So when members don’t end up making money,

they can blame themselves
rather than the scheme,

thinking they weren’t tenacious enough
to earn the returns promised.

Some victims keep trying,

investing in multiple schemes,

and losing money each time.