Within the last month, multiple social media websites have become a place for users to fall victim to franchise fraud, better known as pyramid schemes.
According to the FBI’s website, pyramid schemes “are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses.”
Social media sites such as Snapchat, Twitter, and Instagram have made it easy for people to be recruited into the scheme. Share payments apps like Venmo, PayPal, and Cash App have made it simple for recruits to send the “investment” to the person who is at the top of the pyramid waiting to receive their payment. The apps also make it simple for the person on top to receive their whole payment if the pyramid does not fall before it is time to “cash out.”
The schemes that are plaguing social media require potential victims to “invest” a specific dollar amount, recruit a friend or two to join and invest their money, and then wait until their name reaches the top of the pyramid so they can “cash out.”
This is one of the reasons why many teens and young adults are joining this get-rich-quick scheme. There appears to be minimal effort with maximum financial outcome. An ad posted to Craigslist on Jan. 17 advertised that with the help of seven other individuals, one person could turn $150 into $1,200 in about 48 hours. The ad called the scheme a “money pot” and stated that it was a “group effort,” diverting itself from suspicious activity.
Another reason that teens and young adults are quick to join the illegal profit pyramid is because it is being advertised by people they know and generally trust on social media websites.
A Rocky Mountain College student, who has chosen to stay anonymous, fell victim to one of the schemes that was circulating on Snapchat.
He found out about the scheme and was recruited to participate in it by former classmates, unaware that it was a scam.
The RMC student said that the process was easy because, “All you need to do is Venmo the top person and they input your name to the triangle.”
The student went on to say, “I recruited a few of my friends to join in on the game [but then] I just decided I didn’t want to wait for multiple people, and opted out.”
Although the scheme appears to be harmless since no product needs to be sold, it is still against the law. Pyramid schemes are illegal because “at the heart of each pyramid scheme is typically a representation that new participants can recoup their original investments by inducing two or more prospects to make the same investment. Promoters fail to tell prospective participants that this is mathematically impossible for everyone to do, since some participants drop out, while others recoup their original investments and then drop out,” says FBI.gov.
Some individuals may be blinded by the potential profit amount to ignore any suspicious signs that they may be getting involved in an illegal activity. Fortunately, the U.S. Securities and Exchange Commission provides insight on what to look for in order to avoid being a part of a pyramid scheme.
The U.S. Securities and Exchange Commission says to watch out for, “promoter promises of a high return in a short period of time, no genuine product or service actually being sold, and ‘jobs’ where the primary emphasis is on recruiting new participants.”
“Be skeptical of promises of fast cash – it could mean that commissions are being paid out of money from new recruits rather than revenue generated by product sales. There is no such thing as a free lunch. If you are offered compensation in exchange for doing little work such as making payments, recruiting others, or placing online advertisements on obscure websites, you may be part of an illegal pyramid scheme,” according to investor.gov.