Tomas Syquia, head of the SEC’s Compliance and Enforcement Department, said the public should be more circumspect in investing in companies that offer products with no real value and masquerading as legitimate multi-level networking businesses.
The warning was issued by the SEC in view of the numerous queries received from the public on the legality of operations of several corporations that offer rewards for more referrals.
As part of its campaign against illegal activities, the SEC recently urged Congress to enact a law that will strengthen the agency’s powers in stopping the operations of pseudo-investment and pyramiding schemes.
Pyramid schemes promise consumers large profits based primarily on recruiting others to join their program, not based on profits from any real sale of goods to the public in violation of the Consumer Act of the Philippines.
It is prohibited because plans that pay commissions for recruiting new distributors eventually collapse when no new distributors can be recruited. When such a scheme collapses, people especially those at the base or lower levels of the pyramid, lose their money.
SEC Chairperson Lilia R. Bautista had blamed the lack of laws against pyramiding for the proliferation of deceptive and unfair sales acts and practices of chain distribution operations.
Bautista said although the SEC can file criminal cases against perpetrators of investment scams, the agency is helpless in preventing pyramiding operations.
The economic slowdown makes middle to low income consumers vulnerable to the promise of getting rich quickly and easily, particularly in rural areas.
A Ponzi scheme is closely related to a pyramid because it revolves around continuous recruiting. In a Ponzi scheme the promoter generally has no product to sell and pays no commission to investors who recruit new "members." Instead, the promoter collect payments from a stream of people, promising them all the same high rate of return on a short-term investment.
In the typical Ponzi scheme, there is no real investment opportunity, and the promoter just uses the money from new recruits to pay obligations owed to longer-standing members of the program.
Unlike pyramid or Ponzi schemes, a legitimate multilevel marketing (MLM) scheme has a real product to sell. MLMs actually sell their product to members of the general public, without requiring these consumers to pay anything extra or to join the MLM system.