The FTC declares that pyramid or Ponzi schemes, like the Blessing Loom, are illegal. This is because "they promise consumers or investors large profits based primarily on recruiting others to join their program, not based on profits from any real investment or real sale of goods to the public", making them appealing to people who want to make some quick cash.
Why Do I Say Blessing Loom is a Pyramid or Ponzi Scheme?
Blessing Loom is a pyramid or Ponzi scheme because they do not do any form of investments, sell products or services to make money. Instead, they take money from new members that old members recruit, to pay the same old members. If Blessing Loom fails to recruit new members, they will be unable to pay old members, which will cause the scheme to crash. Once the scheme crashes, the owners will take whatever money they have collected and disappear.
The owners of Blessing Loom just collect money from new members, and pay some out to old members and keep the rest for themselves. That is all they do. Once the pyramid scheme fails, new members will suffer the most, because they will not get back a single dime of their so-called investment. For the owners, it will be a big payday for them, because they would have already collected thousands or millions of dollars from their members or participants.
What is a Pyramid or Ponzi Scheme?
A pyramid or Ponzi scheme is a business model that recruits members via a promise of payments or services for enrolling others into the scheme, rather than supplying investments or sale of products or services. As recruiting multiplies, recruiting becomes quickly impossible, and most members are unable to profit; as such, pyramid schemes are unsustainable and often illegal.
In a pyramid scheme, an organization compels individuals to join and make a payment. In exchange, the organization promises its new members a share of the money taken from every additional member that they recruit. The directors of the organization (those at the top of the pyramid) also receive a share of these payments. For the directors, the scheme is potentially lucrative - whether or not they do any work, the organization's membership has a strong incentive to continue recruiting and funneling money to the top of the pyramid.
Such organizations seldom involve sales of products or services with value. Without creating any goods or services, the only ways for a pyramid scheme to generate revenue are to recruit more members or solicit more money from current members. Eventually, recruiting is no longer possible and most members are unable to profit from the scheme.