Both pyramid schemes and Ponzi schemes are illegal scams that promise investors a high rate of return on their investment and attempt to pay those investors from funds contributed by an endless chain of new investors who pay to join the scheme. In a pyramid scheme, members are compensated based on the number of new members that they can convince to join, while the perpetrator of a Ponzi scheme convinces people to invest in a fictitious business that appears to be profitable because new investors keep investing funds.
Both scams are forms of investment fraud that are designed to fraudulently deprive people of their money. In Hawaii, pyramid schemes are referred to as "endless chain schemes." The table below outlines the law that criminalizes endless chain schemes in Hawaii.
| Code Section | Hawaii Revised Statutes section 480-3.3: Endless Chain Schemes |
| What's Prohibited? | Contriving, preparing, setting up, proposing, or operating any endless chain scheme. |
| What's an Endless Chain Scheme? Â | Any scheme for the disposal or distribution of property where a participant party pays valuable consideration for the chance to receive compensation for introducing one or more new people into the scheme, or for the chance to receive compensation when a person introduced by the participant introduces a new participant. Compensation doesn't mean or include payments based on sales made to people who aren't participants in the scheme and who aren't purchasing in or participating in the scheme. |
Common Examples of Pyramid Schemes
Multi-Level Marketing (MLMs)
Sometimes it can be difficult to determine whether an organization is a pyramid scheme or a legitimate business. This difficulty often arises when evaluating multi-level marking schemes (MLMs) because these organizations can closely resemble a pyramid scheme, but are in fact legal businesses.
Multi-level marketing occurs when a company relies on an endless chain of new members joining the organization. MLM companies generally pay their employees a commission based on both the employee's ability to sell the company's product and on the number of new members the employee can recruit into the organization. The key distinction between MLMs and pyramid schemes is whether or not members are compensated primarily from their recruitment of new members, or from the sale of goods, services, or intangible property. If a member's compensation is tied primarily to their recruitment skills, then chances are that the organization is a pyramid scheme.
Federal Agencies that Prosecute Pyramid and Ponzi Schemes
Additional Resources
State laws change frequently. For case specific information regarding Hawaii's pyramid and Ponzi scheme laws contact a local consumer protection lawyer or criminal defense attorney.
