Pyramid scheme
A scheme in which participants pay for the right to sell a product and the right to earn rewards for recruiting others, with rewards unrelated to sales to ultimate users. It is unlawful, unlike a genuine multi-level marketing business.
The FTC’s business guidance on multi-level marketing sets out the legal test. A pyramid scheme is characterised by participants paying money to the company in return for two things: the right to sell a product, and the right to receive, for recruiting other participants, rewards that are unrelated to the sale of the product to ultimate users. A legitimate multi-level marketing company, by contrast, pays primarily for sales to real customers.
The FTC says there is no percentage-based test to decide whether an MLM is a pyramid scheme. The whole way the plan operates in practice is what is examined. One feature the guidance describes is inventory loading: buying products so that you can qualify for pay, rewards or promotion, rather than to meet your own or a customer’s real demand.
The difference from a Ponzi scheme is the machine. A Ponzi operator typically takes your money and pays earlier investors from it, while a pyramid asks you to build the structure yourself by recruiting. Both depend on a constant stream of newcomers.
Where it shows up
- MLM pyramid schemes · A real product for sale, and a compensation plan that pays for recruiting people rather than for anyone buying it.
- Ponzi schemes and high-yield investment programmes · A rate of return that fails arithmetic, paid from the deposits of the people who joined after you.
Sources
- Business Guidance Concerning Multi-Level Marketing. US Federal Trade Commission. Accessed 2026-10-10. Supports: The Koscot definition of a pyramid scheme, the statement that there is no percentage-based test, and the definition of inventory loading.