What is the difference between a Ponzi scheme and a pyramid scheme? A Ponzi scheme is named after Charles Ponzi (1882-1949) who was one of the most notorious swindlers in American history. What Mr. Ponzi did was defraud people by convincing them to invest with him in his bogus international exchange coupon product for a guaranteed rate of return. Instead of actually investing that money and getting the rate of return which he promised investors, he instead used the money of the later investors to pay “interest” he had promised to the earlier investors. Thus a Ponzi scheme is an investment scheme in which returns are paid to earlier investors, entirely out of money paid into the scheme by later investors. Who makes money in a Ponzi scheme? You guessed it. The early investors.

A pyramid scheme involves the exchange of money primarily for enrolling other people into the scheme; however no goods or services are ever bought or sold.  Pyramid schemes involve a hierarchy, in the shape of a pyramid; hence the name.  The hierarchy is created by people joining under others who joined previously and in which those who join make payments to those above them in the hierarchy, with the expectation of being able to collect payments from those who join below them in the hierarchy.  Thus a pyramid scheme requires an endless stream of recruits for success.  If you think about it logically, the recruiting cannot go on forever because there are a finite number of people on the planet.  A pyramid scheme is a non-sustainable business model.  Needless to say, these pyramid schemes always constitute fraud.  That is why they are illegal.  Pyramid schemes are prohibited by the laws of the United States of America, by the laws of each of the fifty individual states, and by the laws of most other nations. 

Please note pyramid schemes are not illegal because they involve recruiting people to recruit other people to recruit other people. That is perfectly legal and is done to some degree in many legitimate businesses, not just MLMs. They are not illegal because they involve giving money to people. It is perfectly legal to give money to people. They are illegal because they involve deceiving people in order to get money from them: that is the legal meaning of fraud.

Ponzi schemes are similar to pyramid schemes, but differ in that Ponzi schemes are operated by a central company or person, who may or may not be making other false claims about how the money is being invested, and where the returns are coming from. Ponzi schemes don't necessarily involve a hierarchal structure, as in a pyramid scheme; there is merely one person or company that is collecting money from new participants and using this money to payoff promised returns to earlier participants.

Both schemes; the Ponzi scheme and the pyramid scheme are fraudulent activities with which you don’t want to involve yourself!

When a new multi level marketing company comes on the scene, a deliberate effort is made, in many cases, to confuse prospects with regard to the distinction between a legitimate “multi-level marketing” (MLM) company, and an illegitimate pyramid scheme or Ponzi scheme. But there is a vital distinction.

The important distinction is this: With a legitimate MLM, you have a real product or service that is of significant value in and of itself. This product or service is sold to those in the MLM and to regular consumers of the product not in the MLM.

In those pyramid schemes which try to pass themselves off as MLMs, your “product” is something that has very little inherent value, if any at all, beyond the requirement that one must buy it from you in order to join your “downline”.  The “product” may consist of worthless reports, or even electronic codes to unlock a software-based pyramid scheme.  Nobody would buy these “products”, except as part of joining the pyramid scheme itself.  The only opportunity for profit is by collecting money from people joining the pyramid in levels below you.  In a legitimate MLM your profit not only comes from people joining your downline, but from sales of a useful product or service.  In a legitimate MLM, you can profit from selling the product, even to people who have no interest in joining the MLM.

So what should you do?  If you are considering joining a multi leval marketing company (MLM), you should perform your due diligence on the company.  Who are the officers and what are their backgrounds?  What is the company’s “product”?  Would you buy this “product” if you weren’t in the MLM?  Does it have a usefulness in and of itself, apart fomr the MLM?  Can I profit from selling the “product” even if I can’t recruit anyone into the MLM?  Questions like these are all very significant in determineing whether or not you are getting involved in a Ponzi scheme or pyramid scheme. 

In the resources section below I have listed some good websites for you to review to determine if your MLM may be a illegal.