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. |