The U.S. is overflowing with individuals who harbor an entrepreneurial spirit. Startups and small business owners often start from nothing and work their way up the ladder. Even with passion, hard work and determination, there is no guarantee for success. Taking a step back, what happens when people decide to begin at the top?
A pyramid scheme typically acts as a “top down” scam. An individual or a small group of individuals sit at the top of the structure. These individuals are the first to make a profit, while other members below receive whatever is left. Examples of common schemes include wealth pools, Fortune Hi-Tech Marketing and social media pyramid schemes.
Pyramid schemes are popular, despite various state and federal laws that combat the practice. In Texas, there are a few elements that set pyramid schemes apart from other multi-level businesses, which includes:
- Consideration: An individual or small group begins the scheme by putting up a small amount of money – or no money at all – to recruit other members.
- Participation: The idea is for members to sell a service or product, real or fake, and continue to recruit other members to join the pyramid. Usually, joining members pay fees.
- Promotion: The person or group operating the pyramid scheme attempts to lure in new members and investors with plans to cash out early. When it comes time, members at the bottom of the pyramid find there is no money left.
According to Texas Business and Commerce Code § 17.461, a person accused of conducting a pyramid scheme faces harsh penalties. Depending of the size of the operation, a financial fraud charge could result in six months to five years or more in prison, and fines up to $10,000. There are defenses to pyramid scheme charges, so it is extremely important to explore legal routes during this serious situation.