They all sound the same to me!
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Ponzi scheme: There is no real activity of any kind. People “invest” with the central scammer, who provides investment “returns” on paper and sending other victims money to any victim who asks for a withdrawal.
Pyramid scheme: Each layer has a financial stake in recruiting the next layer, who pay them for participation, and collect fees from the next layer. Still no real business model, revenue from operations, etc.
MLM: A pyramid scheme with an actual retail business, distinguished from more legitimate businesses by the emphasis on sellers recruiting other sellers.
They are basically the same. The MLM are legal because they technically sell stuff, as a cover.
A Ponzi scheme is where new investors’ money is used to pay me as profit.
Pyramid Scheme focus on bringing in new people. The majority of my profits come from the dues paid by people I brought in under me.
MLM is close to a pyramid, but it’s focus is more on sales of the people under me and getting a percentage of those commissions.
The two are similar, but different.
A ponzi scheme generally has one person or group at the top who is getting all the income from the new subscribers and then sending some portion to the early investors to make the system look like a winner. There’s really no motivation on the part of the investors to “sell” the product downstream, but they might do so for any number of reasons, including “look how smart I am, I invested in…”
A pyramid scheme puts that load on the people who are signing up, thereby spreading both the workload and money around the system as a whole. In this case, the “investors” have a very strong motivation to try to keep the system going because it’s the income from the people below you going directly into your pocket.
So ultimately, in a pyramid everyone knows its a scam, while in a ponzi that is not necessarily obvious.
They are effectively the same, but some differences:
In a Ponzi scheme you typically have “investors” that give their money to one guy. He then gives himself and the early “investors” payouts as new ones come in, but once the new joiners dry up, there’s no more money for anyone.
A pyramid scheme is similar except instead of paying to the one guy at the top, you’re paying to the person one level up from you on the pyramid. Same scheme, same outcome though.
Obviously those are illegal, so MLMs skirt the rules by having a product to “sell”. Probably important to note that the founder of the MLM Amway was very influential on writing those laws. Anyway, most of the sales will be to new joiners and not to the general public, so the effect is the same – once there are no new joiners the money dries up.
Ponzi scheme: Borrow 100 bucks from A, promising 5% return on investment. Borrow 105 bucks from B, promising 5% return on investment. Use money from B to pay back A, then convince A to make a new, larger investment on the back of your track record. Use that to pay back B. Repeat until the sums of money become big enough, then take the money and run.
Pyramid scheme: Pay money to join the scheme, then get paid a cut of what anyone you recruit pays to join. Money very quickly gets funneled into her upper tiers of the pyramid.
MLM: See pyramid scheme, but you get some form of product to sell for your entry fee, making it legally not a pyramid scheme.
Ponzi schemes, I believe, are specifically for investments. So new investors pay to get in to the investment, and you take this money to pay people who were already invested. So it looks like the investment is paying off, and have a solid return, but it’s not from the stocks performing well just form new people buying. And people think it’s returning well so they are more likely to more money in, and you give this to other investors. But if enough people pull their money out, or you can’t get enough investors, it all comes crumbling down.
MLMs and Pyramid Schemes I think are the same thing, just different names. Pyramid schemes have a negative connotation, so they rebranded them as MLMs. A “supplier” gets desperate people to sign a contract to pay back product. So if they manage to sell the product, both get paid. But if they don’t the supplier can seek reimbursement legally. They rope people in with “be your own boss” or “set your own hours” or “you can earn up to $100,000 a year”.
There is no real “pyramid” in a Ponzi scheme. It typically has a central organizer who keeps on scamming more and more customers, paying back some and eventually absconding with the money. Ponzi schemes are, on the face of it, illegal. There is no “reasonable” Ponzi scheme – it is fraud from the get go.
Pyramid schemes are those that rely on an ever widening base of contacts. An MLM is a kind of pyramid scheme. MLMs are not necessarily illegal – they simply rely on a rather unsupportable distribution model that make it very hard for lower levels to ever make money. As long as goods are bought and sold more or less as promised (even though overpriced or of questionable quality) then an MLM is likely not illegal although rather questionable.
Where MLM is ethically challenged is that it promises a relatively easy way to make money by leveraging a person’s circle of friends and family. To do so, members are enticed into buying lots of goods and tasked with selling them (basically acting as an unpaid salesforce) living entirely off commissions.
An MLM and a Pyramid Scheme are very similar, however a Ponzi scheme is different.
In an MLM or Pyramid Scheme, the revenue flow is pyramid shaped. The idea is that by encouraging members to recruit more people at the level below themselves, everyone above them gets more money. Lets imagine a very simple pyramid with 3 levels, A, B, C. A is the top, they are the head of the company. Beneath them, they have 5 people at level B, who are regional managers. Everyone at level B pays 10% of their income to the person at level A, so more people at level B means more money for the person at A. Beneath each person at level B is 5 people at level C, the sales people. People at level C pay 10% of their income to the person on level B who they report to. People at level A and B make their money from the people on level C, who are the ones actually turning profit by selling whatever vitamin supplement the company produces. People on level C are encouraged to recruit more people at level C; if they recruit enough, they get bumped up to level B, which means they don’t have to work anymore, just let the money flow in from the people beneath them on level C. Notably, in MLM at least, the company is actually selling a product. It might be an overpriced product of questionable quality, but there is an actual external source of income (at least in theory).
A Ponzi scheme works differently, and much more simply. A person is tricked into buying in with a large amount of money, say $100,000. Each month, the person running the scheme will send the victim a ‘return on investment’ of maybe $2,000. By simply paying back the victim their own money, the con artist fools them into believing that they have made a good investment, and even if the con artist keeps half of the initial investment, they still have enough money to keep paying the victim back for 25 months.. The victim then tells all their friends about this amazing investment opportunity, and they all buy in as well. So long as more people keep buying into the scheme, the pot of money keeps growing and the ‘return on investment’ checks keep flowing outwards. The person running the scheme keeps some of the money for themselves, and then simply slowly hands back the rest of it without actually doing anything with it, never investing it in anything like they said they would.
While both MLM/Pyramid schemes and Ponzi schemes are reliant on more people buying in in order to keep themselves running, MLMs do actually sell stuff (which is why they aren’t illegal yet) where Ponzi schemes don’t.
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