We've got news for you.

Register on SowetanLIVE at no cost to receive newsletters, read exclusive articles & more.
Register now

Ways to spot get-rich-quick schemes

Beware, get-rich-quick schemes are evolving.
Beware, get-rich-quick schemes are evolving.
Image: 123RF/belchonock

For many people greed and unrealistic expectations combined with desperation are human cancers when it comes to making investment decisions. Regrettably, decisions are made without asking any questions about the authenticity of the opportunity. The result is the continued loss of cash by people whose initial intention was to make financial returns for their livelihood and sustenance.

The recent presence in our communities of schemes such as “Triple M” or “MMM”, and a recent scheme associated with a cryptocurrency in Ladysmith which left thousands of people out of pocket when the scheme collapsed, has been an unwelcome development, but alas, not a new one. Such schemes have been a part of global societies since the early 1930s when in the USA Charles Ponzi started swindling people out of their money using pyramid schemes. 

These “pyramid-shaped money suckers” have evolved in nature to modern sophisticated online scams, which attract millions of people worldwide in a short space of time. MMM was one such scheme, and it lasted for a very long time. 

Indeed, the sophistication of such schemes has led to the birth of another type of “business” or “investment”, called  “Multi-level marketing” , the best example of which is thought to be Herbalife, an American company listed on the US stock markets, and is run like any other company deserving of a listing on a leading exchange. Except that it survives strictly on continued recruitment of sellers of the products, a big differentiator from normal pyramid schemes that do not sell any product or services. 

Its existence, (Herbalife) is the subject of big debates in boardrooms and in the streets globally, with many seeing it as a solution to their poverty, and some seeing it as a waste of initial capital that they inject to participate in the scheme. Whichever side of the fence people sit on this one, one thing is for sure that it has made a few people rich and many people very poor according to research conducted by Bill Ackman of Pershing Square Capital management in the US, who spent and lost almost $1bn betting that the company would collapse like other schemes with similar traits. 

Another big US scheme that cost over 300,000 people $169m in 2014, was called Fortune Hi-tech Marketing. Bernie Madoff ran a Ponzi scheme that had over $69.5bn (R966bn). Yes, billions. For his greed, he is in jail for 150 years and was fined $170m by a US court. 

The point of this article is to make you aware that based on certain qualities of these schemes you stand a big chance of losing your money if you invest without doing basic due diligence. The typical features include:

  1. You have to invite other people to join the scheme. This is your biggest clue EVER to tread carefully and ultimately steer clear.
  2. You are promised very high returns in a very short space of time, with very limited, if any, explanation on how these returns will be generated. This is a big red flag!
  3. In some cases, you might be asked to sell products or services to other people, who must also in turn do the same. The big question you need to ask yourself is why the business owners are not selling their products in formal or informal shops or street corners but choose to have you do their distribution for them, and in most cases for very limited to no cash returns. 

If ever in doubt, think about this: what if a clever resident of a small island of 1,000 people started such a scheme, and everyone on the island bought into it. How would the scheme grow from there? Who would the last joiners of the pyramid scheme sell to? 

If you do not find the answer, it might just be that there is no answer due to the fact that there is a fixed number of buyers – after the last buyer, the scheme will collapse. 

The risk for the multi-level-marketing schemes is that regulation could change and ban them. This has actually happened in some countries. But broadly, no legislation prevents MLM schemes from conducting their business. It therefore is your responsibility to investigate the “business” before you invest. 

  • Nkomo is a director at Inkunzi Wealth Group


Would you like to comment on this article?
Register (it's quick and free) or sign in now.

Speech Bubbles

Please read our Comment Policy before commenting.