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What is the difference between a Pyramid Scheme and a Ponzi Scheme?


Scams may take many forms, and fraudsters can turn on a dime when it comes to developing new pitches or come-ons for the latest fraud. With so many scandals and disingenuous "professionals" today, it can be challenging to distinguish a legitimate company or investment opportunity versus an illegitimate "Ponzi" or "Pyramid Scheme.

The primary difference between a Ponzi scheme and a pyramid lies in how the operation is promoted.

Illegal pyramids announce themselves as pyramids: They hype levels or stages in their literature. The pyramidal structure helps draw new players, each believing that they will rise through the ranks of the pyramid to become “golden,” or “fully vested”- whatever hokey titles the fraudsters have concocted.

Some pyramid schemes promise that you can earn high profits by making one payment and finding others to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may be "sold" only to other people who also become distributors.

While there are many multi-level marketing (MLM) organizations and programs that are legitimate, there are others that masquerading as a multi-level program and violate federal securities laws. If a program primarily focuses on recruiting others to join the program for a fee, it is likely a pyramid scheme. Be skeptical if you will receive more compensation for recruiting others than for product sales.

A Ponzi scheme, on the other hand, masquerades as some type of investment - in financial instruments, mineral rights, or some other form of speculation. The participants believe they’re buying mortgage-backed securities or partial interest in an oil well. They have no idea they’re funneling money into a bottomless pit. No one suggests moving on to the next level of the pyramid, because the pyramid is not part of the pitch.