Pyramid Operators typically use a seductive but false logic in their pitch.

“It’s easy to invest. Everybody has friends and associates. You only have to sign up four of your friends and you’re good to go!”

Unfortunately, the laws of mathematics are not in the investors favour or corner. The simple reality is that there aren’t enough players to keep the pyramid running. Four people, each finding four further people, will quickly exhaust the available supply of friends and associates.

The pyramid investment structure is built to overcome people’s most common misgivings about investment. Promoters are very specific in their pitches. The offer sounds good and (within its own logic) makes sense. The opportunity is usually pitched by someone familiar to the victim or at least by someone with an affinity the victim trusts. Most important, the pyramid does return people’s money, with the incredible profits attached as promised, in the short term.

Speed is another potent weapon in the pyramid operator’s arsenal.

Often the mark is confronted with “Get in now or regret it forever.” The promise of a lucrative return often means that investments are made with little due diligence being performed. This is perhaps one of the saddest elements of pyramid schemes because often a tiny modicum of due diligence research would have exposed the investment opportunity as a scam.

In both illegal pyramid schemes and Ponzi schemes, new investors’ money is used to make payoffs. The key element in a Ponzi scheme is that initial investors are paid with subsequent investors’ money, with little or no legitimate commerce actually occurring.

This same basic principle applies to an illegal pyramid as well. The original members of the pyramid get rich on subsequent investors’ money. Therefore, a pyramid is a Ponzi scheme.

This begs the further question. Is a Ponzi scheme a pyramid?

The distinguishing factor of the illegal pyramid is the continual need for new investors. Each new member must recruit additional members, who each recruit more etc.

Similarly, Ponzi schemes also require a steady influx of new investor funds to pay dividends. This ever-growing increase in funds might look like a pyramid when graphed. So, in the sense that it requires exponential growth to avoid collapse, a Ponzi scheme is a pyramid scheme.

The difference between a Ponzi scheme and an illegal pyramid lies in how the operation is promoted.

Illegal pyramids are promoted as pyramids, whereas Ponzi schemes are promoted as investment opportunities.

In an illegal pyramid, the pyramidal structure helps draw new players, each believing that they will rise through the ranks of the pyramid (from passenger to pilot or from vice president to chairman).

A Ponzi scheme – on the other hand – masquerades as some type of investment. Thus, when an enterprise promotes an investment opportunity that invests little or none of the participants’ money and uses new investments to make dividend payments, the enterprise is running a Ponzi scheme.