“Pyramid schemes are frauds that are based on recruiting an ever-increasing number of investors. The initial promoters (those at the peak of the pyramid) recruit investors who are expected to bring in more investors, who may or may not sell products or distributorships. Recruiting newcomers is more important than selling products.
No new money is created in pyramid schemes. Investors who get in early take their profits from investors who join later. At some point, no new investors can be found and as a result the last investors, who are at the bottom of the pyramid, lose their money. They also face prosecution, as pyramid schemes are illegal.
Before you invest any money in a multi-level company that could be a pyramid, get all the facts about the company, its officers and its products. Get written copies of the company’s marketing plan, sales literature, contracts and prospectus (a legal document that gives prospective investors information about the company). Avoid promoters who fail to clearly explain their plans. Have a lawyer or accountant explain anything you do not understand. Find out if there is a demand for the product, or if there are similar products on the market. Remember that the greater the promised return, the greater the risk.
Pyramid schemes are illegal under the Competition Act, and serious charges may be brought against you if you are operating or affiliated with one of these schemes.
Effective January 1, 1993, Industry Canada made amendments to the Competition Act, Section 55. A multi-level sales procedure is a pyramid if:
- There is compensation paid for recruiting a new salesperson.
- There is inventory loading, that is, the recruits must purchase an unreasonable quantity of product.
- Purchases are required as a condition of entry. (You may, however, be required to pay for a sample kit, but this kit must be at cost.)