A pyramid scheme is an investment scheme that requires investors to recruit new investors with the promise of being reimbursed with the money that those later investors contribute.

Unfortunately, many schemers manage to get away with running pyramid schemes because they operate under the guise of multi-level marketing practices. In New York, multi-level marketing practices are legal, but pyramid schemes are not.

In order to prevent entanglement with a pyramid scheme, there are some telltale signs that you can look out for.

Required buy-in

This is a red flag in nearly any investment scheme. If the company requires you to pay a large sum of money in order to become an employee or participate in the program, it is likely a signal that something’s not right. Relatedly, if you have to purchase the product or service in order to become a distributor, it may indicate a pyramid scheme.

Recruit-based income

A pyramid scheme depends on recruiting other investors to join the company. Therefore, most of your income will come from the money these new recruits give to the company, rather than the sales that the company makes. You’ll likely receive bonuses or “easy money” simply for recruiting other team members.

Rags-to-riches stories

Pyramid scheme companies will often promise that your large investment will pay off and that you’ll see your money back in no time. They generally promote rags-to-riches stories in order to entice people to invest in their company. By parading as a get-rich-quick fix, pyramid scheme companies can swindle upwards of millions of dollars from hopeful investors.

Don’t fall victim to a pyramid scheme

In the end, you’re likely only to lose a significant amount of money after involvement with a pyramid scheme. Often, they don’t last long enough for investors to actually make a profit, and only the original schemers will walk away with anything.

Pyramid schemes can be wide-reaching and cost investors thousands of dollars. It’s important to be aware of the red flags associated with pyramid schemes so you can protect yourself and steer clear of investment schemes that can have a serious impact on your financial security.

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