Regulation & law
Pyramid scheme
A structure in which participants are paid primarily for recruiting others rather than for selling products to customers.
A pyramid scheme pays participants for bringing in new participants, with money flowing from later joiners to earlier ones. Because the pool of possible recruits is finite, most participants must lose money. Pyramid schemes are illegal in most jurisdictions.
The legal test in the United States, from the 1975 Koscot case, asks whether participants pay for the right to recruit and whether rewards are unrelated to sales to ultimate users. A product does not by itself make a structure legal; what matters is whether compensation depends on real customer sales.
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