Texas Pyramid Scheme Laws
Created by FindLaw's team of legal writers and editors | Last reviewed June 20, 2016
This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw’s team of legal writers and attorneys and in accordance with our editorial standards.
The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area.
A pyramid scheme, or "endless chain," is a fraudulent business practice in which the perpetrator (or "recruiter") creates a business requiring others to pay a fee to join. The new recruits then recruit and collect fees from others, and so on. The business often involves some sort of sales operation, but the main incentive is to collect fees from those "lower" on the pyramid. The higher you are on the pyramid, the more money you make from those below you. Eventually there is no one left to join the scheme and the organization falls apart. Texas pyramid scheme laws are found in the business and commerce code section prohibiting deceptive trade practices. While some legitimate businesses do encourage franchisees to sell additional franchises, it is unlawful if that becomes the main emphasis of the enterprise.
Learn more about Texas pyramid scheme laws in the following table and the in-depth information that follows it. See FindLaw's Fraud and Financial Crimes section for related articles.
| Statute | Business and Commerce Code sec. 17.461 |
| Definition of Pyramid Promotional Scheme | A plan or operation by which a person gives consideration for the opportunity to receive compensation that is derived primarily from a person's introduction of other persons to participate in the plan or operation rather than from the sale of a product by a person introduced into the plan or operation. |
| Who May be Charged | Anyone who contrives, prepares, establishes, operates, advertises, sells, or promotes a pyramid promotional scheme. |
| Classification / Penalty | State jail felony (180 days - 2 yrs) |
Prohibited Pyramid Schemes
A pyramid scheme is a type of fraud that gets its name based on its organizational structure. There are one, or a few people on the top (who are likely the few to actually make money). As they recruit others, and their recruitees recruit others, the pyramid grows a larger base. Each additional recruittee usually has to "buy in" to the business, and that money is sent up the pyramid, with each level of recruiters taking a cut. Any sales you make from the business are funneled up the chain as well, and the individual sellers and low level recruiters are unlikely to make much money from the business.
Texas law tries to prohibit these types of businesses in its Business and Commerce code. The law prohibits business models that are designed to make money based on recruiting others to the business or operation, rather than actual sales..
Who May be Charged With Running A Pyramid Scheme
Getting tricked into participating in a pyramid scheme is not illegal itself. However, Texas law prohibits establishing a pyramid scheme, advertising a pyramid scheme, selling participating in a pyramid scheme, or promoting the scheme.
Penalties for Running a Pyramid Scheme
In Texas, running a pyramid scheme is a felony, which is punishable by jail time between 180 days and two years.
If you would like to know more about Texas pyramid scheme law, or if you have any other questions about deceptive business practices, you may want to speak with a consumer protection attorney. As well, if you have been accused of participating in or promoting a pyramid scheme, there are many attorneys throughout the state with criminal defense experience who may be able to help.
Stay up-to-date with how the law affects your life
Learn more about FindLaw’s newsletters, including our terms of use and privacy policy.