In Kansas, Pyramid and Ponzi schemes are both considered forms of financial fraud. There is a Kansas law that specifically addresses Pyramid schemes, but Ponzi schemes are typically prosecuted under the more general ‘fraud’ umbrella.
What Are Pyramid and Ponzi Schemes?
Pyramid schemes are illegal money making operations for which the recruitment of new members serves as the primary source of revenue. New members, or participants, contribute money to join the recruitment operation. Pyramid schemes often disguise themselves as legitimate business operations by encouraging new members to purchase products related to the scheme and to sell those products in addition to the recruitment of new members. Those who join the Pyramid scheme late will lose money as they run out of members to recruit.Â
Ponzi schemes similarly depend on the introduction of new members (here, investors) for revenue, but the difference is that existing investors aren’t asked to recruit new ones. Existing investors are simply asked to invest their own money into the Ponzi scheme with the promise of great returns. Ponzi schemes work by taking the invested money of newly recruited investors and paying earlier investors with it. As a result, early investors are deceived into thinking that their money has been invested wisely and is giving a significant and positive return. Like Pyramid schemes, Ponzi schemes must eventually fail, as they cannot be sustained.
Kansas Pyramid Scheme Law
| Code Sections | K.S.A. section 21-3762 |
| What’s Prohibited? | Establishing, operating, advertising, or promoting a pyramid promotional scheme. A “pyramid promotion scheme†is defined as any plan or operation for which a participant pays to gain access to the scheme, and in which the primary means that the participant receives compensation is to introduce other participants into the scheme. |
| Penalties | Establishing, operating, advertising, or promoting a pyramid promotional scheme is a severity level 9 nonperson felony punishable by a presumed 8 months imprisonment, assuming that the offender has no prior criminal record or only one prior misdemeanor conviction. The penalty may also include a fine of no more than $100,000. |
| Defenses | It is not a defense to a violation of the pyramid scheme law to show that - in addition to gaining access to the ability to recruit new participants - you were given goods or services to sell. Many pyramid schemes involve the exchange of goods and services that are secondary to the main goal of introducing new participants to the scheme. These pyramid schemes are often referred to as product-based pyramid schemes. It is a defense to assert that you were involved in a Multi-Level Marketing (MLM) business and not a pyramid scheme, however. |
Multi-Level Marketing
MLMs are operations that appear to work similarly to pyramid schemes, but are in-fact legal. MLMs differ fundamentally from pyramid schemes in that the primary source of compensation for participants is not in the recruitment of new participants, but rather in the sale of goods or services. MLMs are frequently confused with pyramid schemes because new participants must also pay a fee to gain access to the goods and services for sale. Remember, the key difference between MLMs and pyramid schemes is whether the operation relies on new recruits to earn money, or whether the operation is sustainable with participants’ sale of goods and services.
Getting Legal Help
If you’ve been charged with a violation of Kansas pyramid scheme or ponzi scheme laws, contact a qualified Kansas criminal law attorney for assistance.
