Pyramid schemes make money by recruiting businesses or people rather than selling real and legitimate products or services, even if a product or service is involved.

In a pyramid scheme, participants are often asked to make a payment, known as a 'participation payment' to join and are promised payments for recruiting other investors or new participants.

The two payments often associated with pyramid schemes are:

• a participation payment to join; and,
• a recruitment payment, promised when a member recruits others.

These recruitment payments often help define a pyramid scheme.  It may be the only or main reason for a new member to join.  The pament involved could equally be a financial or a nonfinancial benefit, given either to the new participant or to someone else.

These schemes inevitably collapse and new members can lose a lot of money.  It is illegal for any business or person to participate in, or persuade others to participate in a pyramid scheme.

A court can consider several factors when identifying a pyraimd scheme.  The Australian Consumer Law does not limit the matters a court can consider however the following characteristics can be used to help identify a pyramid scheme:

• unrealistic claims in regard to future profits;
• the sales and/or promotional material push recruitment very hard; and,
• recruitment payments are a substantial reason to join.