Pyramid schemes make money by recruiting businesses or people rather than by selling real and legitimate products or services – even if a product or service is involved.
These schemes inevitably collapse and new members can lose a lot of money. It is illegal for any business or person to participate in, or persuade others to participate in a pyramid scheme.
The two payments often associated with a pyramid scheme are:
- a participation payment to join; and
- a recruitment payment, promised when a member recruits others investors or participants.
These recruitment payments often help define a pyramid scheme – it may be the only or main reason for new member to join. The recruitment ‘payment’ involved could be a financial or a nonfinancial benefit, given either to the new participant or to someone else.
A court can consider several factors when identifying a pyramid scheme. The ACL does not limit the matters a court can consider however the following characteristics can be used to help identify a pyramid scheme:
- unrealistic claims in regard to future profits;
- the sales and/or promotional material push recruitment very hard; and
- recruitment payments are a substantial reason to join.
For more information on Pyramid schemes see WA Scamnet