Both pyramid schemes and Ponzi schemes are illegal in Maine because they are considered to be inherently deceptive and contrary to public policy. These schemes are deceptive because they require an endless chain of new members to keep the scheme afloat and are doomed to collapse because eventually the scheme won't be able to recruit enough new members.
When the scheme collapses the more recent members won't recoup their investments or make a profit. This article provides a brief overview of both types of schemes and illustrates how they are criminalized in Maine.
How Does a Ponzi Scheme Work?
Ponzi schemes, named after the con artist Charles Ponzi, became prevalent in the United States in the 1920s and are still used to perpetrate investment fraud today. In these schemes there is a single scam artist who creates a fake investment fund and convinces others to pay a fee in order to join the fraudulent investment opportunity. Investors are generally promised a large return on their investment, but are in fact paid with the funds brought in from new investors.
How Does a Pyramid Scheme Work?
Pyramid schemes also start with a single scam artist, however, the structure of the organization is a bit different. In a pyramid scheme, the scam artist induces other to pay a fee in order to join the organization and to then recruit the next round of new members. In this way each member is required to recruit the next round of new members, and the new member fees are distributed up the pyramid to the older members. The table below outlines Maine's primary pyramid scheme law.
| Code Section | Maine Revised Statutes section 17-81-2305: Pyramid Clubs |
| What's Prohibited? | Organizing, participating in, or inducing membership in any multi-level distributorship arrangement, pyramid club, or other group, that is organized under a plan where fees, dues, or anything of material value paid by members is to be given to any other member who has paid for the right to receive such sums. It is illegal if these plans include any provisions for the increase in membership through a chain process of new members securing other new members and thereby advancing themselves in the group to a position where the member in turn receives fees, dues, or things of material value from other members. |
| Exception | If members are paid based exclusively on the sales of goods or services to people who aren't participants in the plan and who aren't purchasing in order to participate in the plan, then the scheme isn't illegal. |
| Penalties | Misdemeanor offense that is punishable by a fine of up to $5,000, and/or imprisonment for up to 11 months. |
Multi-Level Marketing
While pyramid schemes are an illegal type of multi-level marketing, it is important to note that not all organizations that employ multi-level marketing strategies are illegal. Multi-level marketing is simply a business organizational structure where employees are compensated for both the sales that they generate as well as for new salespeople that they are able to recruit.
The key distinction between legal and illegal multi-level marketing schemes is whether or not the product is sold to people who are also buying the right to membership in the pyramid. It is generally a red flag if you are required to purchases the product being sold in order to join the organization.
Additional Resources
State laws change frequently. For case specific information regarding Maine's pyramid and Ponzi scheme laws contact a local a local consumer protection lawyer or criminal defense attorney.
