The following message provides general information on pyramid schemes and was supplied by Alberta Corporate Affairs Securities Commission.
Pyramid schemes are frauds that are based on recruiting an ever decreasing number of investors. The initial promotors (those at the peak of the pyramid) recruit investors who are expected to bring in more investors and 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, will 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 which is a legal document that gives prospective investors information about the company. Avoid promoters who fail to clearly explain their plans. Anything you do not understand, have a lawyer or accountant explain it to you. 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. Remember that 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.)
- company does not have a policy to refund any product you have bought and does not state the exact costs for restocking
- company overstates earning potential and if quoting the high figures does not provide the normal and the lowest figures.
Industry Canada will give any multi-level company an opinion on the legality of the company's plan. This is a free service and any reputable business should avail themselves of this service and any person contemplating entering into business with a multi-level firm should expect to be shown such a Letter of Compliance.
Some recent examples of pyramid schemes are as follows:
- A company falsely advertised large earnings from a multi-level credit card sales scheme. It claimed that participants could build up huge credit lines and never have to pay balances due.
- One company planned multiple-level sales of investment newsletters. It promised to make subscribers part owners of investment portfolios if they enlisted new recruits.
- Another company offered commissions in cash and silver bullion for recruiting new subscribers.
If you have any questions or concerns regarding pyramid schemes, please direct them to Industry Canada at 1-800-348-5358.