Pyramid Schemes
Pyramid schemes are frauds that are based on recruiting an
ever-increasing number of investors. The initial promoters
(those at the
peak of the pyramid) recruit investors who are expected
to bring in more investors, who may or may not sell products
or distributorships. Recruiting newcomers is more important
than selling products.
No new money is created in pyramid schemes. Investors who
get in early take their profits from investors who join
later. At
some point, no new investors can be found and as a result
the last investors, who are at the bottom of the pyramid,
lose
their money. They also face prosecution, as pyramid schemes
are illegal.
Before you invest any money in a multi-level company that
could be a pyramid, get all the facts about the company, its
officers
and its products. Get written copies of the company's marketing
plan, sales literature, contracts and prospectus (a legal document
that gives prospective investors information about the company).
Avoid promoters who fail to clearly explain their plans. Have
a lawyer or accountant explain anything you do not understand.
Find out if there is a demand for the product, or if there
are similar products on the market. Remember that the greater
the promised return, the greater the risk.
Pyramid schemes are illegal under the Competition Act, and
serious charges may be brought against you if you are operating
or affiliated with one of these schemes.
Effective January 1, 1993, Industry Canada made amendments
to the Competition Act, Section 55. A multi-level sales procedure
is a pyramid if:
- There is compensation paid for recruiting a new salesperson
- There is inventory loading, that
is, the recruits must purchase an unreasonable quantity of
product
- Purchases are required as a condition of entry. (You
may, however, be required to pay for a sample kit,
but this kit
must be at
cost.)
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