Answering college students’ questions about pyramid schemes
What they are: scams.
And should you join one? No!
By Bret Saveleski
Knightly News Reporter
bret.saveleski@mymail.centralpenn.edu
Recently, I was approached by a phony businessperson who was recruiting members for a pyramid scheme.
This is not the first time I have been approached by one of these people, but instead of walking away or telling the individual that I knew what he was doing, I decided to pursue it journalistically to inform the public and particularly college students, who are often targets of these schemes.
Below, I have laid out some common questions that you may have about what a pyramid scheme is, why people fall for them and how not to be a victim yourself.
What is a pyramid scheme?
The New York Attorney General’s Office defines a pyramid scheme as a fraudulent system that makes money by recruiting “investors” who will in turn recruit more investors to pay the earliest investors.
Are they illegal?
Pyramid schemes are illegal in most states, including Pennsylvania. In the Keystone State , it is illegal to receive investments greater than $25 for a pyramid scheme.
Do they sell products?
Not always.
Sometimes, it is as simple as “investors” giving those who recruited them money they will then either keep for themselves or give to the person in charge, the New York Attorney General’s Office says.
These operations can also involve the sale of cheap, undesirable, products the investors then attempt to sell.
This is done as an attempt to show legitimacy.
How many end up failing?
These schemes are always doomed to fail due to a glass ceiling on the number of available investors within a community, but it is important to recognize them due to their tendency to go after college students.
If pyramid schemes always fail, why do people get involved in them?
The short answer is greed or desperation, or both. People who start pyramid schemes are, to put it bluntly, con artists. They typically target people in undesirable financial situations, tell them about all the amazing benefits they offer, get them to invest, pay quick returns, and then they have them hooked.
Do they ever make money?
The only people who end up making money from pyramid schemes is the person in charge, the earliest investors who they want to keep on their side and those who recruit the most additional investors.
However, because these operations are illegal in nearly every state and they never go on forever, nobody makes money in the end.
What are the warning signs of a possible pyramid scheme?
- If the person is vague when discussing the opportunity, this is a red flag. If the person is truly confident in their business, then the person will be able to tell you exactly what the person does and why they want you involved.
- For business students, remember the idea of the elevator pitch. For students not studying business, you should know exactly what a person’s business is within two minutes of him or her giving you a pitch. If the person fails to do so, then walk away.
- If the person is not clear about the product he or she is selling. Some key words might be “e-commerce” often repeated but the pitch fails to describe what is being sold.
- Mention of an “investment club” or “gift program” is an automatic red flag.
- Beware of the overuse of corporate speak. If the people pitching the idea know you are still in college, but use a lot of language you don’t understand or sounds scripted, then stay away. Experienced businesspeople know that college students are typically not well-versed in how people in a corporation speak at meetings.
- If it sounds too good to be true, it always is.
Comment or story idea? Contact KnightlyEditors@CentralPenn.Edu.
Edited by media-club co-adviser and blog editor Professor Michael Lear-Olimpi.
