Halloween is celebrated in most North American and European countries on October 31. In Africa, Halloween is barely celebrated because most people believe it is some kind of black magic or witchcraft since it involves the dead coming back to the land of the living to celebrate. Pyramid or Ponzi schemes could be likened to some kind of magic due to the false promises of exponential returns.
Many of us are tempted by the success stories of friends and relatives to jump on the bandwagon, only to be disappointed later. It’s important to remember that investment products as such are not good or bad.
One size does not fit all. Just as a diet that suits one person may not suit another, an investment plan that works for someone else may not work for you.
This bring me to the Ponzi scheme concept. This is often made popular during social circles. A Ponzi scheme is an investment scam that pays existing investors out of money invested by new investors, giving the appearance of earnings and profits where there are none. Ponzi schemes are also known as pyramid schemes.
The scheme is based on recruiting an ever-increasing number of “investors.” The initial promoters recruit investors, who in turn recruit more investors, and so on. The scheme is called a “pyramid” because at each level, the number of investors increases.
Pyramid schemes make virtually all their profits from signing up new recruits and often attempt to disguise entry fees as the price charged for mandatory purchases of training, computer services, or product inventory. Pyramid schemes are not only illegal; they are a waste of money and time.
An example of a pyramid scheme in South Africa was the MMM during 2017. While the MMM online scheme was growing through its rebooted pyramid in South Africa, the list of people who have fallen victim to the scam also seemed to be on the rise.
MMM subsequently froze its platform as users failed to feed the bottom of the pyramid with points collected from cash donations from members. South Africans who lost money in the frozen scheme do not appear to have a legal recourse.
Scamsters often use authority figures such as religious leaders to punt their scams. It is also becoming quite common for scamsters to use well-known brands, and financial institutions as a “front” for these schemes.
But, what are the symptoms of a pyramid scheme?
- Upfront investment – This is not always a sign of a pyramid scheme but all pyramid schemes do it. It is the main source of income, theoretically, not the product being sold. That is only a smoke screen for the scheme.
- Signing people up – Unless you get hired on for a salary or an hourly wage this will be a pyramid scheme. The more people you sign up the more money you make.
- Making a commission off of others work – Unless you are being offered a sales manager position in the company you already work for, then this will be a pyramid scheme. The “pyramid” parts start when you make money off of your friends’ friends’ sales.
- Empty offices – If you walk in the door and there are a bunch of people around your age in chairs with clipboards, a plant on the floor, and a framed picture from target, it would be better to leave.
Another example is the 2019 MTI scam where the company presented itself as an investment platform, and asked new users for at least $100 in funds in the form of bitcoin. The company also offered bonuses for referring and recruiting new members, typical of a multilevel marketing scheme. Through social media, YouTube, and those referrals, MTI grew to hundreds of thousands of users from all over the world. Fortunately for some investors, in August 2020, South Africa’s Financial Sector Conduct Authority (FSCA) warned the public against trading with MTI because it was unlicensed.
Be mindful of “too good to be true” promises, rather think hard and long before depositing money into unregulated investment opportunities. There is no such thing as risk-free “get rich quickly” schemes. Your friends and family may offer you investment advice, but you should be wary of basing your decisions on story telling shared around social circles.
Publication : FPI Newsletter
Spokesperson : Sydney Sekese, CFP® professional and member of the Financial Planning Institute
Date : 9 November 2022