On Pyramiding

1. Q: What is Pyramiding?
   
   A: The pyramid scheme is essentially a business variation of the familiar "chain letters". It is called "pyramid" because the promoters are always at the top of the pyramid-shaped flow of money. Money coming from the later investors flows upward to the top. Being at the top may result in receiving a lot of money quickly. There are three elements to a pyramid scheme, namely: a) a participant pays money to the promoters; b) that payment entitles participant to recruit others to the scheme; c) the other participants are induced to make payment because they are told they will receive a benefit in respect of the introduction of those others to the scheme.
   
   The scheme is basically deceptive because it is premised on the false assumption that all participants could recoup their large investments in the plan simply by recruiting additional participants. Representations used to promote pyramid schemes often emphasize the quick and sizable profits but what is not disclosed is ultimately, as the universe of petential recruits diminishes or exhausted, or the point of rejection is reached, the scheme collapses with many late entrants losing their investments. 
      
   
2. Q: What is the Department of Trade and Industry's jurisdiction?
   
   A: DTI can take action under two (2) existing laws, namely:
   
   
   • Republic Act No. 7394 Consumer Act of the Philippines
     
     Article 53 under Title III on Protection Against Deceptive, Unfair and Unconscionable Sales Acts or Practices in relation to Article 4(k) of Republic Act 7394 relates to pyramid selling and the specific text read as follows: Article 53. Chain Distribution Plans or Pyramiding Sales Schemes. Chain distribution plans or pyramid sales schemes shall not be employed in the sale of consumer products.
     
     Article 4 (k) "Chain Distribution Plans" or "Pyramid Sales Schemes" means sales devises whereby a person, upon a condition that he makes an investment, is granted by the manufacturer or his representative a right to recruit for profit one or more additional persons who will also be granted such right to recruit upon condition of making similar investments: Provided, that the profits of the person employing such a plan are derived primarily from the recruitment of other persons into the plan rather than from the sale of consumer products, services and credit: Provided, further, that the limitation on the number of participants does not change the nature of the plan.
     
     The test in determining whether or not there is a violation of this particular provision of law is, "Does the scheme involve putting up of investment (entry fee and purchase of goods, or purchase of goods alone) for the opportunity to receive earnings derived primarily from recruiting, rather from sales? If the answer is yes, then there is a violation. Otherwise, there is none.
     
     Simply put, what the law prohibits is the use of the pyramid scheme in the sale of consumer goods where recruitment is the main source of earnings.
     
     Pyramiding or chain distribution scheme should not be confused with network or multi-level marketing which is a legitimate marketing strategy designed to generate an increase business volume.
        
   • ACT 3883 As Amended - Business Name Law
     
     As implemented by the Department of Trade Administrative Order (DTAO) No. 80, series of 1982 particularly Sec. 12 (d), DTI is empowered to effect,
     
     "Cancellation or revocation of any license or permit to engage in the business xxx which does not conform with the registered business name or style."
     
     Nowhere in this Act can we find a provision that directly relates to the scheme. However, it has been used to pin down and to ultimately stop the operation of pyramiding entities (sole proprietorship) registered with DTI who are taking advantage of the Business Name Registration System (BNRS) by misrepresenting the Business Name Registration Certificate (BNRC) as a permit in a desperate move to give legal semblance to their fraudulent activity. When the business name registered is not consistent with the nature of business or activity, there is a violation of the business name law, which deserves prosecution and appropriate penalties like revocation or cancellation of business name.