Legal Definitions - chain-referral scheme

A chain-referral scheme, often more commonly known as a pyramid scheme, is a fraudulent business model where participants primarily generate income by recruiting new members into the scheme, rather than by selling legitimate products or services. The scheme promises high returns for participants, but these returns are paid out using the money collected from new recruits, not from actual sales or investments. For the scheme to continue, an ever-increasing number of new participants must be recruited, making it mathematically unsustainable and destined to collapse, leaving most participants (especially those at the bottom) with significant financial losses.

Here are some examples to illustrate how a chain-referral scheme operates:

• The "Exclusive Investment Club"
  Imagine a scenario where an individual is invited to join an "exclusive investment club" that promises extraordinary returns, far exceeding traditional market rates. To become a member, they must pay a substantial upfront fee, say $5,000. The club's marketing materials suggest that these returns come from sophisticated, proprietary trading strategies. However, the primary way members are encouraged to "earn" is by recruiting new individuals to join the club and pay their own $5,000 fee. A portion of each new recruit's fee is then used to pay the "returns" to earlier members and commissions to the recruiter. There are no actual investments generating profit; the money simply circulates from new members to old members.

  This illustrates a chain-referral scheme because the promised high returns are not generated by a legitimate business activity or investment, but solely by the continuous recruitment of new participants whose entry fees fund the payouts to those higher up in the structure. The scheme relies entirely on an expanding base of new money.

• The "Digital Product Reseller Network"
  Consider a company that promotes itself as a platform for reselling "cutting-edge digital education products" (e.g., e-books on marketing, self-improvement courses). To become a reseller, you must purchase an expensive "starter package" of these digital products, costing several hundred dollars. You are then told you can earn significant commissions by selling these products to others. However, the real emphasis in training and incentives is on recruiting new resellers who also buy the starter package. You earn a much larger commission when you sign up a new reseller than when you actually sell a digital product to an end-user. The digital products themselves have little market value outside the scheme, and most participants find it nearly impossible to sell them to non-resellers.

  This demonstrates a chain-referral scheme because while a product technically exists, its primary purpose is to serve as a vehicle for recruitment. The vast majority of income for participants comes from bringing in new resellers who purchase the initial package, rather than from genuine retail sales to consumers. The focus is on building a downline of recruits, not on product distribution.

• The "Gifting Circle" or "Blessing Loom"
  A social media post invites people to join a "gifting circle" where they can turn a small gift into a large blessing. Participants are asked to "gift" a specific sum of money, for example, $1,000, to the person at the center of a small group (often visualized as a flower or wheel). Once they have made their gift, they move to an outer position and are then responsible for recruiting new people to join the circle and make their own $1,000 gift. As new people join and make their gifts, the original participant moves closer to the center, eventually reaching the center themselves, at which point they receive gifts from all the new participants below them (e.g., eight new participants each gifting $1,000, totaling $8,000). There is no product or service exchanged, only money changing hands based on recruitment.

  This is a clear chain-referral scheme because it explicitly relies on new participants joining and "gifting" money to pay off earlier participants. There is no underlying economic activity or value creation; the entire system is sustained solely by the continuous influx of new money from new recruits, making it an unsustainable and illegal pyramid structure.