Most people have heard of pyramid schemes and know that they are an evil to be avoided. However, fewer people know how pyramid schemes operate and why they are illegal.[1] The “pyramid” part of scheme is straightforward and easy to visualize: a small number of people at the top of the pyramid create larger groups of participants in a program below them and so on and so forth towards the base of the pyramid. Nonetheless, the illegal “scheme” is less straightforward. Pyramid schemes are best considered an illegal version of multi-level marketing programs. On the one hand, multi-level marketing programs are legal, because they involve selling a genuine product or service to people who are not in the program.
On the other hand, pyramid schemes are illegal, because they focus on recruiting others to join the program/scheme, and there is usually no genuine product or service. The U.S. Securities and Exchange Commission (SEC) has described pyramid schemes this way: “[t]he 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”[2]
The SEC has also listed several characteristics of illegal pyramid schemes:[3]
- No genuine product or service;
- Promises of high returns in a short time period;
- Easy money or passive income;
- No demonstrated revenue from retail sales;
- Buy-in required;
- Complex commission structure; and
- Emphasis on recruiting
In Illinois, pyramid schemes violate criminal and civil laws, including the Illinois Consumer Fraud and Deceptive Business Practices Act.[4] Unfortunately, in recent years, the SEC has noticed an increase in the number of complaints regarding pyramid schemes, which it attributes partially to the increasing use of social media by fraudsters to rapidly expand the reach of such schemes.[5] For that reason, it is important to keep in mind the above characteristics when browsing Facebook, Twitter, YouTube, etc. so you do not become ensnared in a pyramid scheme.
If you believe you have already been tricked into joining an illegal pyramid scheme, you may have options, including submitting a complaint or tip to the SEC[6] and/or contacting lawyers like Wexler Wallace LLP who specialize in class action lawsuits. Wexler Wallace is currently involved in litigation against a company alleged to be an illegal pyramid scheme. And additional class action lawsuits have recently been filed against other companies alleged to be illegal pyramid schemes, including LuLaRoe (known for its brightly-colored leggings).[7]
[1] For example, although the two are similar, pyramid schemes are different from Ponzi schemes, because the latter is an investment-based scheme rather than product-based.
[2] https://www.sec.gov/fast-answers/answerspyramidhtm.html
[3] https://www.sec.gov/oiea/investor-alerts-bulletins/investor-alerts-ia_pyramidhtm.html
[4] http://www.illinoisattorneygeneral.gov/consumers/pyramid.html
[5] https://www.sec.gov/news/speech/ceresney-remarks-joint-symposium-raise-public-awareness-03022016.html
[6] https://www.sec.gov/complaint/tipscomplaint.shtml#
[7] https://www.buzzfeed.com/stephaniemcneal/lularoe-class-actions?bffbmain&ref=bffbmain&utm_term=.yt44PmMll#.ccLq4vg33
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