The Better Business Bureau would like to caution people to do their homework and avoid the potential risks involved with fraudulent investment schemes.
“We have received a number of inquiries from consumers who have attended presentations involving an investment opportunity,” says Lynda Pasacreta, BBB President and CEO. “They don’t know anything about the company, and are desperate to hear that it is legit. Unfortunately, most of the time it ends up being too good to be true.”
These investments appear lucrative, but often are more hype than substance. The promoter convinces investors that the asset can be further developed with more capital, and the promoter will share the profits with the investors.
In reality, the new capital brought on by new investors is keeping this imaginary investment afloat.
Those are some of the tell-tale signs of a “ponzi” or “pyramid” scheme.
The pyramid scheme is focused on recruitment and not about selling an investment product. Pyramid schemes offer a return on a financial investment based on the number of new recruits to the scheme.
Typically, there are meetings that invite people to enter into an investment, urging that it is a limited time opportunity. With the lure of big returns, those that attend the meeting are encouraged to use their personal contacts to invite friends and family into the deal.
These investment schemes usually only give profits to a select few on the top, and lead to significant investment losses on the bottom.
Remember that, operation or participation in a pyramid scheme is illegal in Canada and can lead to criminal prosecution.
Consumers can protect themselves from investment schemes by doing the following:
Get the facts. If you do go to an information session, collect business cards, promotional materials, and ask questions such as, who are the principals of the company? When the company started? Ask how much is the start-up cost?
Gather as much information as possible, before agreeing to anything. Pass along the information you collected to your local RCMP.
Research the company. Contact the BC Securities Commission (www.bcsc.bc.ca) and the Better Business Bureau to see if there is a history with this company or its principals. Even doing a simple internet search can yield some interesting consumer reports on potential “ponzi” schemes.
Not all investments are fraudulent. Multi-level or "network" marketing plans are a way of selling goods or services through distributors. These plans typically promise that if you sign up as a distributor, you'll receive commissions for your sales and those of the people you recruit to become distributors.
However, the focus of these plans should be selling a viable product, not the recruitment of others, or other limitations including your financial contribution.
Joining a multi-level marketing company is legal in Canada, but consumers still have to ask questions to determine if it right for them:
What's the company's track record? What products does it sell? Is the product competitively priced? Is it likely to appeal to a large customer base? How much is the investment to join the plan? Is there a minimum monthly sales commitment to earn a commission? Will you be required to recruit new distributors to earn your commission?