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I see that hypotheticals don't typically go over to well on this SE site but I'll give this a shot.

EDIT: I originally posted as 'Ponzi' but I meant 'pyramid'

Was talking with a friend tonight about a hypothetical situation and the implications of full-disclosure on law and was hoping some of you might be able to settle the debate. (This is for US law btw)

Suppose I launched a company called Pyramid Scheme, inc. And we were 100% direct and transparent that this was a Pyramid scheme. We literally explained word for word that it is a Pyramid scheme:

You can put money in and we pay you out based on the next people that put money in after you. If you are stuck on the bottom rung you will likely not see a return, THIS IS A Pyramid SCHEME.

I know (I'm pretty sure) Pyramid schemes are illegal, but if you completely disclose it and are 100% open about it, is it still illegal? I'm not talking about the fine print either, I'm talking about very direct straight forward declarations, even to the point where the name of the company is 'Pyramid Scheme inc'.

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  • The short answer is "no" it is usually not legal. The analysis will have to wait.
    – ohwilleke
    Dec 8, 2017 at 18:34
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    Also Ponzi and Pyramid scheme are pretty much definitionally equivalent. Both mean that higher levels get their income from lower tier investor/employees and not as a share of ultimately retail sales. Pyramid schemes are called Ponzi scheme, because his Pyramid scheme was the first famous case to litigate one.
    – ohwilleke
    Dec 8, 2017 at 21:17
  • One objection is that you have no control over whether you are in the bottom tier (and hence lose your money) or one of the middle ones (and hence get money from those on the bottom; this is an unlicensed lotttery. It's not a great argument, but I have seen it used to close down a scheme in England; courts tend to be unsympathetic to confidence tricks.
    – Tim Lymington
    Dec 9, 2017 at 11:44
  • This is a good question. It seems that Pyramid Schemes have been traditionally described as fraudulent because they are deceptive. So is it actually the case that the gravamen of "pyramid scheme" violations is the traditional deception as to the nature of the scheme, or are pyramid-type financial arrangements inherently illegal no matter what you disclose (e.g. in the manner that illegal drugs are still illegal to sell even if you disclose their nature to customers)?
    – Robert Columbia
    Mar 7, 2019 at 13:04
  • @ohwilleke Hello again. In a pyramid scheme, a participant has a well-defined "depth" in the tree. Is that the case in a Ponzi scheme? Or is the "depth" now continuous? Am I missing something obvious?
    – Rodrigo de Azevedo
    Apr 23, 2020 at 19:47

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You might get away with it under federal law. But there are potentially also state laws to worry about. Under Texas law 17.461:

"Pyramid promotional scheme" means a plan or operation by which a person gives consideration for the opportunity to receive compensation that is derived primarily from a person's introduction of other persons to participate in the plan or operation rather than from the sale of a product by a person introduced into the plan or operation.

A person commits an offense if the person contrives, prepares, establishes, operates, advertises, sells, or promotes a pyramid promotional scheme. An offense under this subsection is a state jail felony.

As you can see, there's no requirement under this law that there be fraud involved.

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  • Ah I should word this better I definitely meant 'Pyramid scheme'. Edited original post now
    – Albert Renshaw
    Dec 8, 2017 at 0:30

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