An investment fraud that involves the payment of purported returns to original “investors” (the scheme organizers) or early entrants from funds contributed by late participants who have been conned into “investing” their money in the scheme. The fraudsters or organizers of the scheme lure new participants to join by promising them huge returns with tiny or zero risk. Unaware investors can simply part with their cash at the prospect of easy money.

The money received from late participants are usually used to make promised payments to early “investors” who don’t actually engage in any legitimate investment activity or project, but rather use the proceeds to fund lavish lifestyles such as buying luxury homes and cars or flying in private jets. Therefore, pyramid schemes typically pay returns to contributors of funds using further funds, not profits. However, this very nature of a pyramid scheme bears the seeds of self-destruction as no legitimate earnings are produced by the scheme and where continuity requires a consistent flow of funds from new entrants. Eventually, it becomes more difficult to attract new “investors”, while existing “investors” seeking to cash out, the scheme ends up collapsing from inside.

The first pyramid schemes were carried out in the 1920s by Charles Ponzi, an American citizen, who deceived thousands of New England residents by promising a 50% return in just 90 days.

Pyramid schemes are also referred to as Ponzi schemes.