FAQ #3: Is Lyoness a pyramid scheme or a Ponzi scheme?

Question: is Lyoness a pyramid scheme or a Ponzi scheme?

Short answer: Lyoness operates both pyramid and Ponzi schemes.

Long answer:

All around the internet, there seems to be a lot of confusion about the difference between a pyramid and a Ponzi scheme - and a straight answer is almost never provided. Recently, for instance, we read the contribution of a fellow-commentator who stated that although the Lyoness business model could be called a 'pyramid scheme', it wasn't too bad, for it was not a 'Ponzi scheme'.

Thus, obviously, such confusion can have negative repercussions for the general understanding of the Lyoness racket, as well as of the numerous comparable scams that are present in our contemporary society.

Although we feel that we have already largely addressed this issue in our earlier FAQ post 'Is Lyoness a scam?', we still get many visitors through the search term 'Lyoness pyramid ponzi'. To avoid all confusion, we would like to provide our take on the matter, hoping to clear up a few things.

First, it should be noted that pyramid schemes and Ponzi schemes are not very different from each other. In fact, English author David Brear years ago coined the term 'closed-market swindle' to accurately deconstruct every type of pyramid and Ponzi swindle available to us. Indeed, pyramid schemes and Ponzi schemes share as the most important common denominator a near absence of external revenue. In other words, the only money that can possibly come out of such a scheme, is the money that came in earlier. The (near) absence of external revenue makes it impossible for everyone to gain from the scheme. Only a fixed amount of 'investors' or 'participants' can actually make more than they have put into the scheme, as there is simply not more money available. David Brear, in response to our earlier FAQ post, shared a very insightful (copyrighted) analogy:

"Probably the best way to explain what indicates the operation of a closed-market swindle, is to imagine a smooth-talking bunch of charlatans (e.g. Hubert Freidl and his schills) persuading 10 000 excited persons each to place $3000 on a table - by assuring them them that a magic, but very complicated, system has been discovered by which each contributor can get back more money than he/she started with. The only proof which the charlatans produce to confirm this attractive fairy story, is their own apparent prosperity.

Obviously, no matter what incomprehensible hocus-pocus is wheeled out, the resulting $30 millions cannot be divided up so that each and every contributor gets a profit, but this revenue can be divided up so that the minority of smooth-talking charlatans who control its division will win massively whilst the powerless majority will lose."

Then why distinguish between a pyramid and a Ponzi scheme? Basically, this is just a technical difference, meant to indicate how the scam was played out. The term 'pyramid' is used to indicate that the scheme revolves around 'geometric progression', i.e. that in order for someone to make some money, there will always be more investors or investments needed. When visually represented, this leads to a pyramid shape. However, the same concept applies to Ponzi schemes, in which additional investments are also needed to keep the scheme going.

The term 'Ponzi scheme' derived from the famous Italian-American racketeer Charles Ponzi. He founded the 'Securities and Exchange Company', through which he promised investors to double their investments within 90 days by buying cheap stamps in Europe and exchanging them for more valuable US stamps. Although his idea would work in theory - if it weren't for all the red tape he had to cut through - it would never render enough revenue to pay off all his investors. Therefore, Ponzi gave up on his 'golden idea', and instead started paying off his earlier investors with the money brought in by new investors - the 'Ponzi scheme' was born.

Inevitably, such a scheme collapses as soon as it runs out of (enough) new investments. Key to the concept of a Ponzi scheme is that (nearly) all investors in the scheme are kept in the dark about the true functioning of the scheme - i.e. no-one is told that their profits derive from the investments made by later-joining investors. Nevertheless, the high returns in the beginning of the period in which the scheme runs, make early investors honestly recommend the scheme to their acquaintances as a great way to make some extra money. Consequentially, the 'recruits', who trust their friend/relative who recommends this great opportunity to them, invest too, and thus the scam expands. This expansion is thus mostly based on word of mouth advertising.

Other racketeers sought to exploit this concept, and capitalised the concept of word of mouth advertising by telling their investors that it is key to their own financial benefit that they recruit new investors into the scheme. This type of scam is commonly referred to as a pyramid scheme, although there are some languages, like German, in which it is called a 'pyramid game'. The 'game' part of this term refers to the emphasis on the recruitment of new investors by the existing investors, which technically gives the victims an opportunity to determine whether they become one of the very few winners or one of the many many losers. This of course does not change the fact that market saturation considerably decreases the chances of later-joining investors to find enough new recruits to benefit from the scheme.

Note that the business model remains largely similar, and that much like Ponzi's tale of the lucrative stamp exchange, the racketeers leading the pyramid scheme will also work up an excuse (or disguise) to hide that the only revenue present in the scheme derives from the investments of participants. (In the case of Lyoness, this would be the effectively valueless shopping community). Yet, it is at all times clear to the participants that if they want to make a lot of money, they will need to recruit others into scheme.

As mentioned, Lyoness operates both pyramid and Ponzi schemes. The pyramid scheme is called the 'position' system, in which acquired positions increase in value when more acquired positions enter the system. Additionally, the amount of brought in investors (measured in the amount of positions they acquired) determines how high the monthly system commission paid to the initial investor is. The more investments brought in, the higher the commission.

The Ponzi schemes are disguised as advertising campaigns, from which high returns can be expected due to the expansion of the company in the countries where these campaigns are organised, which flow into the company and then back to the investors. This has not happened, and it has been reported that only a small part of the invested sum for these campaigns has actually been spent on the advertising campaigns. The rest of the money has been used to pay off earlier investors and to subsidise the extravagant lifestyle of the Lyoness instigators. The same goes for the 'option trading' schemes set up by Lyoness. Both the advertising campaigns and the option trading schemes were organised - obviously - without issuing a financial prospectus. This had led the Commercial Court of Vienna to conclude on several occasions that these investments should be refunded by Lyoness.

Both the pyramid scheme and the Ponzi schemes were of course masked by the redundant 'international and cross sectoral' shopping community that Lyoness claims to make its money with.

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The Lyoness FAQ (Frequently Asked Questions) section was designed to provide the general public with answers to the common questions about Lyoness they may struggle with. The section will also provide yet another way to structure the content of this Blog - and direct the searches of people interested in our content to exactly the information they seek.

Which questions are discussed in this section is based on three factors. We have combined the questions that our readers have asked us through the comment system of this Blog (and the answers we have given to these questions) with the most used search terms (often questions too) to reach our Blog. Thirdly, we would like to give our readers the opportunity to ask questions through the comment system of our Blog. Depending on the nature of the question, and the frequency in which it is asked, we will decide to answer it individually or make a 'FAQ' post out of it.

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