Pyramid scheme

A deceptive business model in which participants’ returns depend chiefly on recruiting new members rather than selling goods or services. It requires continual recruitment and collapses when new participants cannot be found.

Ponzi scheme: A fraud that pays earlier investors with money taken from later investors while concealing the source of returns. Both rely on incoming money, but a Ponzi scheme usually centralizes deception under an operator rather than requiring participant recruitment.
Charles Ponzi: An Italian-born swindler whose 1920 investment fraud made his name synonymous with schemes paying earlier investors with later funds. His fraud is often confused with pyramid schemes, though participants did not need to recruit others.
Federal Trade Commission: A United States agency that enforces consumer-protection and competition laws. The FTC investigates pyramid schemes and explains how compensation structures can reveal them.
Sunk cost: A cost already incurred that cannot be recovered and should not affect a rational future decision. Participants may keep paying fees to avoid admitting that earlier scheme costs are lost.
Direct selling: A retail method in which sellers market products directly to consumers outside fixed retail locations. Direct selling can be legitimate when compensation rests on genuine customer sales rather than recruitment.
Exponential growth: Growth in which a quantity increases by a fixed proportion over equal intervals. Recruitment promises imply explosive growth in participants, a requirement that cannot persist indefinitely.
William Miller (confidence man): A Brooklyn confidence man convicted in 1899 for a fraudulent investment operation known as the Franklin Syndicate. His operation illustrates an early American recruitment-and-investment fraud that preceded modern terminology.
Federal Trade Commission Act: A United States law prohibiting unfair or deceptive acts or practices in commerce. The FTC uses this statute to challenge deceptive recruitment and earnings claims.
Loss aversion: The tendency to experience losses more strongly than equivalent gains. Fear of losing prior payments can keep participants recruiting after warning signs appear.
Investment fraud: Deception involving investments, including false claims about assets, risks, or expected returns. Pyramid schemes overlap with investment fraud but are specifically sustained by recruitment.

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ScamBroader topic: Its recruitment structure can conceal the lack of a sustainable product or income source.