The Identity of a Pyramid Scheme
What exactly makes a Pyramid Scheme? According to the Consumer Protection Act 2018, it is “where participants in the scheme receive compensation derived primarily from their respective recruitment of other persons as participants”.
Assumedly, that definition is clear as daylight. It is important to remember that being part of a pyramid scheme is just as detrimental as starting one, or being an agent of one. To avoid being on the wrong side of the law, take the definition above into perspective.
A few other defining factors of pyramid schemes are listed below.
No Value Add
In order for anyone to turn a profit in this world, they must add some sort of value, or STEAL. The likelihood is if an organization does not seem to be adding any value to its consumers, yet is still making the bucks, they are probably stealing somehow. Think about this; a bank helps keep your money safe, a hardware store helps you build your dream home, a door to door salesman provides the convenience of not having to go to the store yourself.
One likeness of most pyramid schemes is that logically speaking, they add no value to anybody, at least not legally. Money is taken from one person and given to the other – an exchange of hands of money that does not necessarily translate to an exchange of a value product, or service.
If you stick to this rule alone, you should be able to avoid many a pyramid scheme. Think about things with a sober, logical approach.
Joining Fees
Typically, a pyramid scheme will have joining fees. While this in itself is not a problem, the problem is it is difficult to recover your joining fees unless you recruit people to join. The other factor is that usually, beyond recruiting other members, the scheme will have no other means of making money. So essentially joining fees are the only revenue for yourself, and the scheme as a whole.
Again, to use logic, if a pyramid scheme was so successful as to recruit every single person in the world, how would the very last people to join earn their money, since everyone is recruited already? Simple answer is that they won’t. However, if everybody in the world was supplied with a carton of milk today, we could still sell the same milk tomorrow because some would have consumed it with their cereal or tea.
Any organization that makes money primarily from joining fees is likely to be a pyramid scheme. Avoid them.
No identifiable Regulatory Body(s)
It is important, whenever parting with money, to identify who the regulator is for the person/company you are transacting with, and who can be held accountable if there are any mishaps. In the investment industry, we report to NBFIRA, banks to BoB and the like. Pyramid schemes are usually self-regulated and it is near impossible to put a finger on who started or owns it all. Hence if you run into some trouble, you will likely be on your own.
While this is not necessarily a defining factor for pyramid schemes only, it can really save you from losing your hard-earned money.
“Guarantee”
One of the quickest ways to pick out a scammer from a legitimate financial salesperson or advisor, is the reckless use of the word “guarantee”. Always remember, however unsettling this might be for you, that investment carries with it an element of risk. You are rewarded for taking that risk, hence the age-old adage “the higher the risk the higher the return”. While the adage should probably be amended to “the higher the risk the higher the probability for a higher return”, it is a simple way to remember that risk is inevitable when investing and therefore investing carries no guarantees.
Limited Time Offers
Pyramid schemes are infamous for making offers that are only valid for a limited time. This has the effect of inhibiting you from taking the time to do a proper due diligence on the product/service being offered, but also quite importantly gets you excited about making a hasty decision. Believing that you are being given “an offer that is hard to refuse” is the name of the game. The excitement from this prospect, is one way most people get entangled in some of the world’s most fishy schemes.
Let’s stay away from pyramid schemes.
Happy investing!
This article was authored by Kgori Capital, a leading investment management firm.