I have received many reader queries about MMM and whether or not it is a safe investment. For example, Seraki writes: “My friends and colleagues are making a lot of money every month through this MMM, and I am tempted to join. I know that there are risks, but we must take risks at some point to be successful.”

The Consumer Protection Act describes a pyramid scheme as anything that promises an investor an annual interest rate of 20% above the repo rate, which is currently at 6.25%. Currently MMM claims to pay between 20% to 100% per month but makes it clear that this is not a yield and not guaranteed.

MMM is the brainchild of Russian national and convicted criminal Sergei Mavrodi who ran a similar scheme in Russia in the 1990s. When that scheme collapsed, thousands of investors lost millions of dollars.

Based on the information provided on its website, MMM follows a classic pyramid structure. The participants derive their income or return on investment primarily from the recruitment of new members. In other words the returns are not based on investments or the selling of any product but on money paid by new people joining.

The philosophy is that you offer assistance by paying a joining fee. Say, for example, all members pay R1 000 to join and the monthly return is 20% (R200). As a new member, this R1 000 that you pay would be divided among five existing members giving them each R200. The next month you receive “assistance” and a portion of the next new member’s joining fee is allocated to your account.

In this basic example you would need one new member per five existing members to keep the scheme afloat just to meet a 20% return – let alone the 100% return.

For example, once there are 10 000 members, in order for each member to receive their 20%, a further 2 000 members would have to be recruited the next month. As they join so the speed of recruitment has to increase. Now you have 12 000 existing members and need 2 400 new members the next month, 2 880 the following month and then 3 456 new members the next month, and so on. This is a compounding affect and hard to maintain. Existing members will be working really hard to recruit new members in order to keep the system going.

MMM uses a virtual currency called Mavro (based on the surname of the founder) which is purchased via the official virtual Bitcoin currency. We can only infer that what your Mavros are worth in Rands is determined by how much someone buying or selling Bitcoins with Rands would be prepared to pay.

The scheme has been investigated by the National Consumer Commission which states that it has “handed all related information to the SAPS for further handling.”

Given the investigation by SAPS, no doubt to be followed by the Receiver of Revenue, along with rising concerns around the viability of MMM, it seems likely that the scheme will collapse sooner rather than later. While it is certainly true, as Seraki points out, that “we must take risks at some point to be successful”, it is also true that successful people take sensible risks.

This article first appeared in City Press.