Pyramid Scheme

Ponzi Scheme

Typical “hook”

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.

Earn high investment returns with little or no risk by simply handing over your money; often the investment does not exist or only a small percentage of incoming funds are actually invested.

Payments

Must pay a one-time or recurring participation fee and recruit new distributors to receive payments.

No recruiting necessary to receive payments.

Interaction with original promoter

Sometimes none. New participants may enter the pyramid scheme at different levels.

Promoter generally interacts directly with all participants.

How the scheme works

Funds from new participants are used to pay recruiting commissions to earlier participants.

Funds from new investors are used to pay purported returns to earlier investors.

Collapse

Fast. An exponential increase in the number of participants is required at each level.

May be relatively slow if existing participants reinvest money.