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MathsGee Android Q&A

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Discuss the difference between the following investment schemes.

(a) Pyramid schemes
(b) Ponzi scheme
(c) Multi-level marketing (network-marketing)

Explain why the first two are illegal and the third one is considered to be legal.
in Data Science & Statistics by Diamond (75,025 points) | 31 views

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(a) Pyramid schemes are illegal investment schemes in which participants make money primarily by recruiting new members rather than through investments in a legitimate business. They are called "pyramids" because they typically have a hierarchical structure, with each layer of participants recruiting new members to join the scheme. Eventually, the scheme collapses because there are not enough new members to support the existing ones.

(b) Ponzi schemes are also illegal investment schemes in which returns are paid to existing investors from funds contributed by new investors, rather than from profit earned by the operator. Like pyramid schemes, they rely on the constant influx of new investors to generate returns for earlier investors. They are named after Charles Ponzi, who became infamous for using the technique in the early 20th century.

(c) Multi-level marketing (network-marketing) schemes, on the other hand, are legal. They are a form of direct selling in which a company's salespeople are also incentivized to recruit others to sell the company's products. The recruited salespeople, in turn, earn a percentage of the sales made by the people they recruit. In a legal MLM, the company makes money primarily through the sale of its products and not from recruitment. However, some MLM companies have been accused of operating pyramid or Ponzi-like schemes, in which the primary focus is on recruitment rather than sales, and this is illegal.
by Diamond (75,025 points)

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MathsGee Android Q&A

MathsGee Android Q&A