The Ontario Securities Commission is telling investors to be alert for signs of pyramid schemes.

The OSC says pyramid schemes work by rewarding participants for recruiting others. Participants initially pay a fee to join a club, or invest money in a company or product. The concept behind the scheme is that the initial participants get paid from the fees collected from new recruits. Unfortunately, the pyramid ultimately collapses.

In its warning, the OSC draws particular attention to product-driven pyramid schemes, which it says can be confused with legitimate multi-level marketing plans (MLMs).

The key difference, the watchdog says, is that in a product-driven pyramid scheme, the product is sold only to the scheme’s participants and not to the general public.

Participants may be told that their profits will be based on both sales and recruitment of new distributors, but recruitment usually pays more than product sales. What the participants don’t know is that there is no market for the product, and even if there were, the company would not be able to sell at a competitive price due to the markup required to pay all distributors involved in the scheme.

The OSC says that basic math proves that pyramids eventually collapse. If one person recruited six distributors, who each recruited six others, at nine levels the pyramid would require more than ten million recruits.

It warns that participants in the lower levels of the pyramid are at high risk of losing their money because they have few, if any, recruiting opportunities.

The OSC offers these tips to avoid getting involved in a pyramid scheme:

  • Be sceptical about outlandish claims, and testimonials from “elite members.”
  • Research the company to make sure that their focus is on service or product sales, and not recruitment, and don’t fall prey to high-pressure sales tactics.
  • Call the OSC Contact Centre toll-free at 1-877-785-1555 to inquire about investment scams.
  • Verify any information you receive with a credible source before investing your money.

The OSC says investors can learn more about investment fraud online at www.investorED.ca.