Ponzi scheme or pyramid scheme
Both pay earlier participants with money from newer ones, but US regulators describe them differently. A Ponzi scheme pays returns out of new investors' money. A pyramid scheme pays mainly for recruiting.
- The SEC defines a Ponzi scheme as "an investment fraud that pays existing investors with funds collected from new investors."1
- The FTC says that in a pyramid scheme your earnings "would be based mostly on how many people you recruit, not how much product you sell."2
- The FTC says a multi level marketing business that is not a pyramid scheme pays "based on your sales to retail customers, without having to recruit new distributors."2
- A scheme can be both. In its 2022 Forsage case the SEC alleged a pyramid scheme in which investors profited by recruiting others, and also a Ponzi structure in which new investors' assets paid earlier investors.3
- The FTC says most participants in pyramid schemes eventually "run out of money, have to quit, and lose everything they invested."2
Sources
- US Securities and Exchange Commission (Investor.gov), Ponzi scheme (28 October 2026)
- US Federal Trade Commission, Multi level marketing businesses and pyramid schemes (28 October 2026)
- US Securities and Exchange Commission, SEC charges eleven individuals in $300 million crypto pyramid scheme (1 August 2022)