A pyramid scheme is an arrangement under which money paid by the most recent investors flows back to earlier investors. The arrangement offers high returns to the earliest investors, which are achieved only when additional recruits can be convinced to pay into the scheme. In essence, each new investor must bring in a large number of additional investors in order to achieve a return, and each of those investors has to bring in even more investors in order to do so. Thus, the scheme looks like a pyramid, with one person at the top and an ever-expanding group at the bottom. The scheme depends on an increasing number of investors to join; once the number of new investors declines, the pyramid collapses and the latest investors lose their funds. When unchecked, pyramid schemes can result in massive losses by thousands of people. This arrangement is fraudulent, since investors are being hoodwinked into investing when there is no actual return on investment; instead, funds are simply shifted from the latest investors to earlier investors.
Multi-level marketing companies have been accused of operating as pyramid schemes, since each level of sales representative is encouraged to recruit a group of additional sales representatives, and then shares in the profits from any sales generated by this group. In this situation, the focus is less on generating new sales and more on recruiting new sales representatives.