Although it has been around for decades, lately, it seems to be on everyone’s lips. Just mentioning it is almost a bad omen, and we all try to avoid it. But do we really know what it is? What does it involve? Have we been victims of it without even knowing? Today, we’ll try to clarify these questions and prevent more people from falling into this scam.

What is a Pyramid Scheme?

First and foremost, it’s important to make it clear that it’s a scam. A scam is designed to deceive a person into making a financial decision—most commonly, handing over money—that they wouldn’t have made without being misled.

Pyramid schemes are punishable by law because they constitute a crime. Essentially, a pyramid scheme is a business that recruits investors under false promises of making them rich. Although the structure presented may seem legal, sustainable, and even easy to achieve, this is not the case. To make a profit, the recruited investor must find others and convince them to invest in the company because it is with the money from these new “investors” that the company pays the earlier ones—not from any real business activity.

These kinds of companies don’t have real sources of income. They rely entirely on the investments of the people they “recruit” as investors, so if they go bankrupt, the affected individuals will never see their capital returned (since the company doesn’t generate income from any activity), and in many cases, they will be left with debts that are difficult to repay.

How Can I Avoid Falling Victim to a Pyramid Scheme?

It’s crucial to always be on alert when a company promises substantial profits in a short time and with supposedly low risks because, realistically, such a scenario is unlikely to be viable. All investments carry risks and depend heavily on luck. Remember, if it sounds too good to be true, it probably is.

Another key point to watch for is if a primary aspect of the business is recruiting others to join the company. While the idea of selling a product might not seem bad, if the main income comes not from selling the product but from recruiting others to invest in selling the product, you’re likely dealing with a pyramid scheme.

If they don’t make it clear how much you will earn at the end of the month, what your earnings depend on (many schemes hide that recruitment is the main source of profit), and there is generally little transparency within the company, it’s highly likely that you are facing a scam.

Finally, the most visual alert to determine if you are dealing with a pyramid scheme is if the internal structure resembles a pyramid, as the name suggests. In Spain, it’s important to note that Law 3/1991 states: “Article 24. Pyramid Sales Practices. It is considered misleading and therefore unfair in any circumstance to create, direct, or promote a pyramid sales scheme where the consumer or user is required to make a payment in exchange for the opportunity to receive compensation derived mainly from the recruitment of other consumers or users into the scheme, and not from the sale or supply of goods or services.”

When Does a Pyramid Scheme Collapse?

A fraudulent business collapses when it stops receiving new investors and no more capital flows in. At this point, it falls apart, and people stop making profits and are left only with debts. That’s why many people start reporting these cases when the business has already failed.

This happens because the business wasn’t sustained by its activities or the goods it sold, but by the investments of new investors who were being recruited, believing the company was viable and that they would gain profits by investing in it.

What Do Pyramid Schemes Look Like Today?

As more people become aware of these schemes, thanks to the wealth of informative content in the media, these fraudulent businesses have been forced to reinvent themselves and move into more modern sectors, mainly by offering online businesses, often through fake websites that mimic legitimate ones.

Besides, if you’ve been offered a business opportunity and suspect it might be a scam, it’s advisable to speak with a lawyer or financial advisor who can examine the investment before you start investing.

Not every multi-level structure is necessarily a scam, but if you think it might be, you should contact a lawyer. In fact, multi-level companies can be legitimate and are regulated under Law 7/1996, but it’s important to get proper advice before risking your money in a business.

If you feel you’ve been a victim of a pyramid scheme and need legal advice, we invite you to contact us. Piñera del Olmo is a law firm that can provide excellent service, thanks to its well-trained and specialized lawyers in these types of cases. To get in touch with us, call 93 514 39 97 or 675 58 14 62. If it’s easier for you, you can email us outlining your case at: rpinera@pineradelolmo.com.