Pyramid and Ponzi schemes are two types of investment fraud that involve creating the illusion of profit by paying early investors with the funds contributed by new investors. In a pyramid scheme, the offender generally creates a fraudulent business that new recruits are required to pay a fee to join. The new recruits then entice the next round of investors to join the organization and so forth.
The structure of a Ponzi scheme is very similar; however, these scams involve a single offender (or a small group of offenders) who create a fraudulent business, attract investors with the promise of a high return on their investment, and then pay old investors with funds contributed by new investors. Both of these scams collapse when the scheme can no longer attract enough new investors. The table below outlines South Dakota's law that criminalizes pyramid schemes.
| Code Section | South Dakota Code section 37-33: Pyramid Promotional Schemes |
| What's Prohibited? | No person may establish, promote, operate, or participate in any pyramid promotional scheme. A limitation as to the number of people who may participate or the presence of additional conditions affecting eligibility for the opportunity to receive compensation under the plan doesn't change the identity of the plan as a pyramid promotional scheme. |
| Definitions | Promote: The term "promote" means contrive, prepare, establish, plan, operate, advertise, or otherwise induce (or attempt to induce) another person to participate in a pyramid promotional scheme. Pyramid promotional scheme: The term pyramid promotional scheme means any plan or operation in which a person pays for the opportunity to receive compensation that is derived primarily from the introduction of other people into the operation rather than from the sale of goods, services, or intangible property by a participant introduced into the operation. |
| Penalties | Establishing or operating a pyramid promotional scheme is a Class 5 felony punishable by five years in prison and possibly a fine of $10,000. Any person who knowingly participates in a pyramid promotional scheme is guilty of a Class 1 misdemeanor punishable by one year in jail, and/or a fine of $2,000. |
Multi-Level Marketing
In is common for pyramid schemes to be confused with legitimate multi-level marketing (MLM) strategies. In a multi-level marketing strategy employees are compensated for both the sales that they make as well as for the sales made by recruits that the employee convinced to join the organization. Whether a strategy is a legitimate multi-level marketing plan or an illegal pyramid scheme generally depends on: (1) whether or not legitimate products or services are sold, and (2) the manner in which participants are compensated.
Additional Resources
State laws change frequently. For case specific information regarding South Dakota's pyramid and Ponzi scheme laws contact a local criminal defense lawyer or consumer protection attorney.
