Pyramid schemes are so named, because they resemble a pyramid structure, starting with a single point on top, that becomes progressively wider towards the bottom.
In the classic “pyramid” scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.
The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse.
At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money.
Pyramid schemes can become impossible to sustain and are often illegal. Different types have existed for at least a century in different guises such as chain mail (or chain e-mail) and Ponzi schemes, which work on the premise of “Robbing Peter to pay Paul” and offer too-good-to-be-true returns on investments. Some multi-level marketing plans have been classified as pyramid schemes.
Source: U.S. SEC: www.sec.gov