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Pyramid Schemes: Don’t Get Caught or Else…

Posted on February 21, 2014 by Mintzer Law

Running a pyramid scheme in Texas is illegal and could mean doing time in a state jail and paying substantial fines. There are legitimate business ventures that have many of the same characteristics as a pyramid scheme, so you could find yourself wrongly accused of committing a crime and require the assistance of an attorney to defend you.

What is a Pyramid Scheme?

In its simplest form, a pyramid scheme is an operation in which people are offered the opportunity to invest money and receive compensation by recruiting others to join the venture. What makes the operation illegal under the Texas Business and Commerce Code is when the compensation paid to existing members of the plan is derived primarily from the money paid by the new investors who are recruited to join.

An example of a typical pyramid scheme is where a person recruited to invest in a business venture is promised a percentage of the fee paid by each new member that the person recruits. The balance of the membership fee is distributed to other members of the venture. New people joining the venture will only make money if they recruit new investors willing to pay to join the venture.

A legitimate business venture might have new investors making money by selling a product with the profits derived from the sales being distributed to members. Recruiting new people to join the venture increases the sales of the product and generates more money for the members.

Defenses to a Ponzi Scheme

Asking someone to pay a fee to join a business venture and share in its profits might not be a pyramid scheme. Defenses to a prosecution for promoting a pyramid scheme include:

  • The person charged with committing the crime was not promoting the Ponzi scheme
  • The venture involved the sale of an actual product
  • The venture was not structured as a pyramid scheme

The key element that distinguishes an illegal pyramid scheme from a legitimate business venture is the emphasis on the sale of shares in the plan to obtain a return on investment. The existence of a product and the promotion of the product as a means of making money for the business and the investors is what defense attorneys focus on when defending someone accused of promoting a pyramid scheme.

Penalties for Promoting a Pyramid Scheme

The crime of promoting a pyramid scheme in Texas is prosecuted as a state jail felony. If you are convicted of the charges, the statute authorizes a judge to sentence you to serve a minimum of 180 days to two years in a state jail. The judge can also impose a fine up to $10,000 in conjunction with or in lieu of the state jail sentence. If you are convicted of pyramid schemes, then you could be facing hefty fines. Get a hold of Rand Mintzer today by calling 713-862-8880.