SECP notifies regulations to prohibit Ponzi, pyramid schemes

The Securities and Exchange Commission of Pakistan (SECP) has unveiled new regulations aimed at curbing Ponzi schemes, pyramid schemes, deceptive multi-level marketing (MLM) and unlawful referral marketing. These rules, set out in the Companies (Prohibition of Unlawful Activities) Regulations, 2026, seek to tighten controls over financial fraud and misleading business practices across both physical and digital platforms.

The regulations apply to all companies, including foreign entities, and prohibit business models where earnings come mainly from recruiting new participants rather than genuine product sales. They also target practices involving funds collected from new investors to pay earlier participants, promises of unrealistic returns, excessive joining fees, mandatory inventory purchases, and hiding how investor funds are used.

Further prohibited are schemes involving products with little real market demand, misleading claims about income or products, inadequate refunds or buy-back arrangements, and the sale of unregistered, unapproved or illegal goods. Pyramid schemes with unclear contracts, unreasonable purchase conditions or multiple participation tiers designed to generate rewards through recruitment are also banned.

However, SECP clarified that legitimate direct-selling businesses, where compensation primarily comes from sales to end consumers, are still allowed.

The regulations also cover existing schemes that exhibit characteristics of unlawful activities, regardless of whether they operate physically or digitally. Companies are barred from promoting, conducting or facilitating such activities. Violations may result in penalties under Section 512(2) of the Companies Act, 2017, and could lead to other enforcement actions like winding up companies under Section 301.

SECP Chairman Dr Kabir Ahmed Sidhu said the regulations would bolster defenses against deceptive practices and financial exploitation, aiming to promote legitimate business while protecting the public. He stressed caution against schemes promising unusually high returns, particularly those rewarding recruitment. The SECP urged investors to verify the legitimacy of companies before investing.