Investment fraud often involves promising unrealistic returns for a moderate initial investment. Most people think of investment fraud as an issue that affects those with millions of dollars and property and professional financial advisors. However, those trying to start their own businesses are also frequently victims of investment fraud.
There are many people who might intentionally misrepresent how lucrative business opportunities are in the hopes of taking advantage of people who want to become their own bosses. Unfortunately, sometimes people with enough capital to invest and the work ethic to run their own businesses fall victim to pyramid schemes.
What is a pyramid scheme?
A pyramid scheme is essentially a small business opportunity that requires not just sales but also the constant expansion of the network of other small business owners. Pyramid schemes are distinct from other types of small business and investment fraud in how they promise returns for investors based on how many other people sign up underneath them within the company.
People enter the organization as sales associates in many cases but can become local or regional managers as they sign up more people to sell under them. Salespeople receive a commission, but so do those above them within the company’s hierarchy.
This system is innately unsustainable, as eventually the pool of those willing to buy the products or sign up as salespeople all but disappears. At that point, those who invested later in the scheme may find that they invested in a business that never generates any profit. The greater the initial startup investment, the greater the harm a pyramid scheme can potentially cause.
Those who fell victim to investment fraud when seeking legitimate business and employment opportunities may have grounds to take legal action. Reviewing what appears to be a pyramid scheme with a legal professional can help frustrated investors effectively evaluate their options.