How to avoid pyramid selling schemes
What are "pyramid selling schemes"?
Pyramid selling schemes are "get rich quick" schemes that are illegal in New Zealand under the FAIR TRADING ACT 1986.
The problem with these schemes is that the method of earning money depends mainly on recruiting more people, rather than through selling goods or services. With most pyramid schemes there is a substantial joining fee. It is very unlikely that you will be able to make enough money through the scheme to cover your initial joining fee.
Generally the schemes do not work because the market of potential members is simply too small. For example, in a scheme in which you need to recruit 10 people (who in turn each need to recruit 10 people), there would need to be one million members by the time the scheme reached the sixth level.
Pyramid schemes are prohibited under the Fair Trading Act 1986
Under the FAIR TRADING ACT 1986 it is an offence to promote or operate a pyramid selling scheme.
The Act defines a "pyramid selling scheme" as a scheme:
- that provides for the supply of goods or services, or both, for reward, and
- that, to many participants in the scheme, constitutes primarily an opportunity to buy or sell an investment opportunity (whether personally or through an agent) rather than an opportunity to buy or supply goods or services, and
- that is or is likely to be unfair to many participants because:
- the financial rewards of many of those participants depend on recruiting additional participants (whether or not at successively lower levels), and
- the number of additional participants that must be recruited to produce reasonable financial rewards to participants in the scheme is not attainable or is not likely to be attainable by many of the participants
"Chain letter" schemes
"Chain letter" schemes are also prohibited under the same provision as pyramid schemes if the scheme in question is likely to be unfair to many of the participants for the same two reasons listed above in relation to pyramid schemes. Unfair chain letter schemes are prohibited whether or not they provide for the supply of goods or services.
What are the penalties for pyramid schemes?
If you promote or operate a pyramid selling scheme, you may be prosecuted and fined up to $200,000. If you made a commercial gain through promoting or operating the scheme, you can also be ordered to pay an amount up to the value of that gain.
The difference between pyramid schemes and multi-level marketing
Pyramid schemes are different from multi-level marketing, which is legal in New Zealand. While multi-level marketing involves recruiting salespeople, the profits you earn come primarily through selling merchandise or services that you buy from the company for a lesser amount. Unlike a pyramid scheme, the multi-level marketing scheme would fall apart if the goods or services were not bought.
Sometimes promoters of pyramid schemes will describe their scheme as a multi-level marketing operation, so it is important to look into the substance of the scheme rather than just its label.
Who should I contact if I have concerns about a proposed scheme?
Before participating in or promoting a scheme that has a joining fee or that makes bold claims about your potential earning power, you should contact the Commerce Commission or the Consumers Institute, who monitor pyramid schemes. The Consumers Institute lists many pyramid schemes on its website at www.consumer.org.nz/scams.
If you suspect that somebody has promoted a pyramid scheme to you, you should contact the Police or the Commerce Commission, so that they can investigate.
- As with any investment of a substantial amount of money, you should obtain independent legal advice before you invest in any scheme. Your lawyer will be able to advise you as to the terms of the contract and any ongoing obligations you will be required to fulfil (such as monthly fees).