What is a pyramid scheme and how to spot one

A pyramid scheme is a setup in which you pay to get in and earn by recruiting others who also pay, not by selling a product or investing in anything real. That's why most people always lose: the money from the bottom flows up to the top until new people stop arriving. It's illegal in the US, where the FTC goes after pyramid schemes posing as multi-level marketing, and in the UK, where the law bans it in all circumstances. The biggest one in history by number of victims, Sergei Mavrodi's MMM, wiped out the savings of between 5 and 10 million Russians in 1994, according to the press of the time.

How does a pyramid scheme work?

Almost all of them follow the same script:

1. The entry fee. To take part you have to pay: a sign-up fee, a “starter kit,” a training package or a minimum amount of product. That fee is the fuel of the whole system.
2. The income promise. They tell you you'll make back what you paid, and much more, as soon as you bring in a few people. The presentations show cars, trips and testimonials from the people at the top.
3. Recruitment. Each new member pays their fee, and part of it goes up to whoever brought them in and to the levels above. What gets rewarded isn't selling; it's bringing in people.
4. The product as a cover. It may not exist, or it may be overpriced, worthless or bought only by the members themselves. It's there to make the system look like a business.
5. Exhaustion. Each level needs many more people than the one before. When recruitment slows down, the people at the bottom can no longer earn back what they paid, and the system caves in.

Why do most people always lose?

The math. If every participant has to recruit six people to break even, the first level has 6 members, the second 36, the third 216 and the tenth more than 60 million. By the thirteenth level you'd need more than 13 billion people, more than the population of the planet. Long before that, the system grinds to a halt, and those who joined in the last levels, who are always the majority, lose their fee.

It isn't a flaw in execution: it's the design. A pyramid scheme can't end well for everyone because it never creates wealth; it only moves it from those who arrive late to those who arrived early.

What does the law say in the US and the UK?

In the United States, the FTC considers pyramid schemes illegal and, in its business guidance on multi-level marketing, still relies on the test from its 1975 Koscot decision: a pyramid scheme is one where participants pay money for the right to sell a product and to receive rewards for recruiting others that are unrelated to sales to end users. Many states also have their own statutes; Virginia's, for example, targets schemes in which most of the compensation comes from bringing in other people. The SEC, for its part, warns that some pyramid schemes pose as MLM programs to sell investments.

In the United Kingdom, Schedule 20 of the Digital Markets, Competition and Consumers Act 2024, in force since April 6, 2025, lists among the practices “in all circumstances considered unfair” establishing, operating or promoting “a scheme where a consumer gives consideration for the opportunity to receive compensation that is derived primarily from the introduction of other consumers into the scheme rather than from the supply or consumption of products.” The same ban was previously in the Consumer Protection from Unfair Trading Regulations 2008. When there is also deception to keep the money, it can be prosecuted as fraud on both sides of the Atlantic.

The same legal logic draws the line for multi-level marketing, which is legal: a network of distributors that earns a margin on sales to the public. The full boundary between the two, with a table, is in Ponzi vs pyramid scheme vs MLM: how they differ.

Which pyramid schemes made history?

• Baldomera Larra (Madrid, 1876). She's often cited as the first recorded pyramid scheme. Strictly speaking, her savings fund worked like a Ponzi scheme: it promised 30% a month and paid the first investors with money from the next ones. We tell the story in the case of Baldomera Larra.
• MMM (Russia, 1994, and MMM Global until 2018). With nonstop TV ads, Sergei Mavrodi sold the public shares whose price he set himself and that only went up while new money kept coming in; that's why many scholars also describe it as a Ponzi scheme. When it collapsed in July 1994 and he was arrested for tax evasion, many victims defended him, and that same year he was elected to the State Duma, which gave him immunity. In 2007 he was sentenced to four and a half years for fraud. Its global version reached Nigeria in 2016, where it left about three million people hurt. The full story is in the case of Mavrodi and MMM.
• OneCoin (2014–2017). Ruja Ignatova sold “educational packages” that came with a cryptocurrency without a real blockchain, and the sellers were paid for recruiting others. According to the FBI, which added her to its Ten Most Wanted Fugitives list in 2022, the fraud topped $4 billion. She disappeared in October 2017 and is still wanted. Read the case of Ruja Ignatova and OneCoin.

Notice the pattern: the product changes (shares, banknotes, cryptocurrencies), the mechanism doesn't.

How to spot a pyramid scheme

Ask yourself these questions before you pay:

• Do I get paid for bringing in people? If a big part of what you can earn depends on how many people you recruit, that's the main red flag.
• Do I have to pay to get in? A fee, a package or a required minimum purchase to “activate” your spot.
• Would anyone outside buy the product? If only members buy it, or it costs much more than something similar in a store, the product is the cover.
• Are they pressuring me with urgency and lifestyle? Limited spots, events with loud music, cars and trips as proof.
• Are they asking me to keep it quiet? Or to ignore “people who don't get it”: your family, your bank, the press.

If in doubt, ask in writing exactly how the money they're promising is made, and check it outside the circle of whoever is offering it to you. The FTC's consumer guide on MLM businesses and pyramid schemes has more questions to ask. Run the offer through MATERIUM's scam checker and, if it's pitched as an investment, look it up on FINRA BrokerCheck in the US or on the FCA Warning List in the UK.