pyramid schemes

Best tips on how to spot a Pyramid Scheme

What is a Pyramid Scheme?

Pyramid scheme is a sketchy and unsustainable, business model, where a few top-level members recruit newer members, who pay upfront costs up the chain, to those who enrolled them. As newer members in return recruit underlings of their own, a portion of the subsequent fees they receive is also kicked up the chain. Often called “Pyramid Scams”, these operations are illegal in some countries.

The difference between a Pyramid Scheme and Multi Level Marketing or MLM for short.

The difference between a pyramid Scheme and a lawful MLM program is that there is no real product that is sold in a Pyramid Scheme. Participants attempt to make money solely by recruiting new participants into programs.

Types of Pyramid Schemes.

Multi Level Marketing(MLM) Pyramid Scheme

MLM is a legal business practice, but unlike traditional Pyramid Schemes, but this model involves the sale of actual goods or services, but participants are not mandated to close any sales in order to generate income by recruiting members below them.

Ponzi Shceme

Are investment cons which work on the premise of “Robbing Peter to pay Paul”. They may not necessarily adopt a Pyramid Scheme’s hierarchical structure, but they do promise high returns to existing investors by taking investment money from new blood. Often lured by the prospect of too-good-to-be true returns. Most Ponzi participants end up losing everything

Investment adviser Bernard Madoff, arguably the most notorious Ponzi Scheme artist.

Is a Pyramid Scheme Illigal?

A Pyramid Scheme are not only illegal, they are a waste of money and time. Because Pyramid Schemes rely on recruitment of new members to bring in money, the Schemes often collapse when the pool of potential recruits dries up.

How to spot a Pyramid Scheme

If you hear the following just run!!!

No genuine product or service

Promises of high returns in a short time period

Easy money or passive income

Buy-in required

Emphasis on RECRUITING

Eventually the music will stop. The question is who ends up with all the money and who is left behind in the dust?

Crowdfunding, the umbrella for Pyramid Schemes

What is Crowdfunding?

Crowdfunding is defined to provide the finance for a business project, typically using the the internet. Crowdfunding is not only used for business, but also for charitable and creative endeavour. They make use of platforms such as Kickstarter, CofundMe and BackaBuddy

Regulation or Crowdfunding in South Afric

As it currently stands, Crowdfunding is not explicitly regulated in South Africa. The Financial Services Board (FSB) have advised as such, but some Crowdfunding activities may already be subject to existing legislation.

The Crowdfunding model is so new that a lot of laws haven’t caught up with it, and so accessible that users may be diving in without fully realizing the costs or rules they have to follow. The system is still open to abuse or misuse. Lucky there are some guidance in the laws we have and laws that are being written.

When you sign on as a backer of a project on Kickstarter, what kind of transaction is that anyway? Is it a donation or gift? Is it a purchase of a perk, or is it an investment? For the sake of sustaining the Crowdfunding model, let’s hope it’s not the one.

There are other more specific rules from when a company goes public(that is selling stock to anyone who wants it) which involve all sorts of disclosures that must be made to investors and the Government.

So whats going on when thousands of people invest in a Crowdfunding campaign?

Well…we sort of don’t know. The law is still catching up, but the good news is that most sates are falling on the side of saying Crowdfunders are not investors. Even if backers get nothing in return or the value of a perk, is far less than the amount you paid, the taxman may see the money as a way of paying someone to do some labor, which brings us back to income. And, unless you’re legally organized as a non-profit entity that qualifies for tax exemption, these are not clearly nontaxable donations.

When is Crowdfunding illegal?

Pyramid Schemes could be considered the original Crowdfunding, insomuch as those few on the top of the Pyramid Scheme, fund themselves from the large crowd at the bottom.

Both Pyramid Schemes and Ponzi Schemes involve investors, taking advantage of unsuspecting individuals by promising them extraordinary returns in exchange for their money. social-media-scams-and-how-to-spot-them

pyramid scheme
pyramid scheme

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