Sections 27-29 UWG regulate the prohibition of pyramid schemes and gambling-like distribution systems, where customers are enticed to participate not because of the actual product or service, but because of a promised chance of winning. In a pyramid scheme, the customer pays a fee and is supposed to gain an advantage by recruiting further individuals who, in turn, join under the same conditions. In a gambling-like distribution system, on the other hand, the delivery of goods or the provision of services depends entirely or predominantly on luck, a lottery, or other chance. The customer decides not because of the product, but because of the prospect of profit or repayment. The UWG expressly prohibits certain models and extends the prohibition to corresponding advertising measures; violations can also result in a fine of up to € 2,900.

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Prohibition of Pyramid Schemes and Contractual Models
under Section 27 UWG

Such systems are inadmissible in commercial transactions and may not be used for sales promotion. Companies may neither use nor disseminate these models to acquire new customers or achieve economic benefits. The crucial factor here is that the system is not based on genuine economic performance, but on the recruitment of further participants.

Typical characteristics include, in particular:

• mandatory fee for entering the system
• a promised service or benefit
• dependence of this benefit on the recruitment of further participants
• use in commercial transactions for profit generation
• missing or subordinate economic value of a product or service

Precisely this combination is crucial. The prohibition protects consumers from making economic decisions not based on genuine performance, but on structurally disadvantageous systems.

Structure and Process of a Pyramid Scheme

A pyramid scheme exists when a participant must pay a mandatory fee and is promised a service or benefit, which, however, depends on further individuals being brought into the system. A pyramid scheme always follows a simple but deceptively effective process. It often appears to be a legitimate business model, but in reality, it relies on exponential growth.

At the beginning, there is a provider who offers a product or service. However, this product often plays only a subordinate role. What is crucial is the promise to earn money through referrals.

The typical process is as follows:

• A participant joins and pays an amount
• They receive the opportunity or obligation to recruit new participants
• For each new participant, they receive remuneration or repayment
• The new participants repeat exactly the same process

The system grows incrementally in levels, similar to a pyramid. While the first participants can still profit, the situation for later participants deteriorates significantly. The more people participate, the harder it becomes to find new individuals. As a result, the chances of winning decrease rapidly.

In practice, this means:

• The majority lose money
• Early participants profit
• Later participants bear the risk

Prohibition of Gambling-like Distribution Systems Dependent on Chance under Section 28 UWG

Section 28 UWG always applies when economic success depends on chance. The law protects consumers from not certainly receiving goods or services, even though they have already paid.

Such a system exists when the delivery or service is determined by a lottery or another element of chance. The customer then no longer makes a classic purchase decision, but is effectively participating in an uncertain outcome.

The decisive difference from a normal purchase:
The customer cannot influence whether they actually receive the service.

Typical manifestations are:

• allocation of services by lottery
• dependence on unpredictable events
• incentive through chance of winning instead of product quality

The law thus prevents gambling mechanisms from being specifically used in sales. The consumer should receive a clear and reliable consideration for their money.

Requirements for Lotteries and Other Forms of Chance

A violation under Section 28 UWG only exists if the service actually depends on chance. The decisive factor is therefore not every promotional campaign with a chance to win, but whether the customer receives the goods or services certainly or only by chance.

A lottery is when the allocation of the service follows a system in which a winner is drawn. This can be done classically via tickets or digitally. The key is that the outcome is not foreseeable.

A further element of chance exists if the success:

• does not depend on the customer’s behavior or skill
• is not solely controlled by the provider
• is determined by unpredictable circumstances

The weighting is important:
Chance must play a decisive role. It is sufficient if the outcome is predominantly influenced by chance.

Difference Between Pyramid Scheme and Chance-Based System

Pyramid schemes and chance-based distribution systems follow different mechanisms, but lead to similar risks.

In a pyramid scheme, economic success depends on whether a participant can recruit enough new customers. Profit thus arises from active participation in the system.

In a chance-based distribution system, however, the customer’s behavior does not decide, but predominantly chance. The customer only receives the goods or services if a specific event occurs, such as a lottery.

The differences can be clearly presented:

• Pyramid scheme: Profit through recruiting new participants
• Chance-based system: Profit through luck or chance
• Pyramid scheme: Active participation required
• Chance-based system: Outcome is beyond the customer’s control

Despite these differences, both models have one thing in common:
They distract the customer from a factual decision and prioritize uncertain promises of profit. From a legal perspective, the legislator therefore intervenes in both cases to protect consumers from financial losses and misleading business models.

Prohibition of Disguised Directory Entry Offers Section 28a UWG

Not every form of disguised advertising automatically falls under this prohibition. The regulation specifically covers those misleading business practices where an offer is deliberately designed to appear like an existing payment obligation. The recipient is intended to gain the impression that they must pay an invoice, although in reality, a contract would only be concluded through payment.

The focus here is on so-called offers for directory entries. This refers to offers where companies or self-employed individuals are to be entered into a business directory, online register, or similar database for a fee.

Typical are letters or forms that outwardly appear like official documents, thereby creating trust. Such letters often give the impression that they are:

• an existing invoice for an alleged service
• a payment slip that only needs to be settled
• a form for confirming or correcting an existing entry
• an official-looking notification with a payment request

The legal focus is therefore not on every form of misleading advertising, but on this specific design of forms and letters. The overall impression is always decisive: If an average recipient assumes a payment obligation, although in reality only an offer exists, the line to unlawfulness has been crossed.

Requirements for Clear Identification of a Contract Offer

An offer must be designed in such a way that there is no doubt about its nature. The provider bears full responsibility for ensuring that the recipient is not misled.

The identification must:

• be clearly visible and easy to understand
• immediately catch the eye
• not be relativized by design elements

In practice, this means:

• The notice must not be hidden
• The design must not create an official impression
• The recipient must recognize without close reading that no payment obligation exists

An offer must be designed in such a way that there is no doubt about its nature. The provider bears full responsibility for ensuring that the recipient is not misled.

Sebastian Riedlmair
Harlander & Partner Attorneys „The nature of the offer must be recognizable at first glance and not only after close examination.“

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Prohibition of Solicitation and Advertising for Unlawful Systems under Section 29 UWG

The law prohibits not only the systems themselves, but also their promotion. Thus, Section 29 UWG intervenes earlier and prevents such models from spreading at all. This particularly covers cases where companies send invitations, letters, or other communications to many people to induce them to participate in a prohibited system.

The decisive point: Even the solicitation can be unlawful, even if no contract is concluded.

Typical forms of such advertising are:

• mass mailings by post or email
• invitations to presentations or events
• promotional letters with promises of participation

The law is directed not only against the operator, but against all parties involved who actively contribute to the dissemination.

Distinction from Permitted Business Models

Not every distribution system with a referral character is automatically prohibited. The decisive factor is whether the economic focus is on a genuine service or on the recruitment of new participants.

Permitted business models are based on customers paying for a product or service because they receive a concrete benefit. While referrals may play a role, they are not central to the compensation system.

An inadmissible system, on the other hand, exists if:

• revenues primarily come from recruiting new participants
• the product plays only a secondary role
• economic success depends on system growth

The distinction is often difficult in practice because prohibited systems are deliberately designed to resemble reputable models. Therefore, a holistic view of the business model is always necessary.

Difference from Reputable Distribution Systems

Reputable distribution systems rely on verifiable services and transparent compensation. Customers here pay for a product they actually want to use, and not for an uncertain chance of winning.

A key difference lies in the motivation of participants:

• In reputable models, the product benefit is paramount
• In prohibited systems, the expectation of a financial advantage dominates

Further clear distinctions are:

• Compensation based on sales, not mere recruitment
• No compulsion to refer
• No unrealistic promises of profit

A reputable system functions even without constant growth, whereas a pyramid scheme is necessarily dependent on it.

Significance of Chance and Customer Recruitment

Chance and customer recruitment are the central risk factors of these models. Both elements shift the decision away from an objective evaluation towards uncertain expectations.

Customer recruitment plays a decisive role, especially in pyramid schemes. The participant must actively acquire new people to gain an advantage themselves. This creates constant pressure to refer.

Chance, on the other hand, characterizes gambling-like distribution systems. Here, success depends on whether an unpredictable event occurs, such as a draw or lottery.

The combination of these factors leads to typical problems:

• Unpredictable chances of success
• high financial risks for participants
• emotional decisions instead of rational consideration

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Typical Characteristics and Warning Signs

Pyramid schemes and similar models can often be recognized by recurring patterns. These systems appear attractive at first glance, but upon closer inspection, they show clear warning signs.

A particularly striking feature is the exaggerated promise of profit. Participants are led to believe that they can earn money quickly and easily with little effort. At the same time, concrete information often remains vague or incomplete.

Further typical indicators are:

• focus on member acquisition rather than product quality
• complicated or opaque compensation models
• time pressure when deciding to join

Another warning sign is the lack of sustainability of the system. If economic success is only possible through constant growth, it is usually not a stable business model.

Role of Social Relationships and Pressure Situations

Pyramid schemes deliberately exploit personal relationships. Participants often turn first to friends, family, or acquaintances because trust exists there.

This closeness means that decisions are no longer made purely objectively. Many people agree because they:

• do not want to disappoint anyone
• feel under social pressure
• do not want to strain a personal relationship

The system consciously reinforces this pressure. Participants often receive incentives or guidelines to recruit new people as quickly as possible. This creates a dynamic in which more and more people feel involved, even if they have doubts. In the long term, this can not only cause financial damage but also strain or destroy personal relationships.

Legal Consequences and Risks

Participation in such systems is not only economically risky but also legally problematic. The law deliberately intervenes strictly to protect consumers and prevent unfair business models.

A central point is the ineffectiveness of the underlying contracts. Participants are not legally obliged to adhere to such systems.

In addition, there are further risks:

• loss of invested money
• possible legal disputes
• administrative penalties for participation or promotion

The role in the system is also crucial. Anyone who actively recruits new participants or promotes such a model can themselves face legal consequences.

Overall, it shows: The risks significantly outweigh the potential benefits, which is why an early legal assessment is particularly important.

Invalidity of Contracts

The legal consequences differ significantly depending on the type of system.
For classic pyramid schemes, the legal situation is particularly strict: Such contracts are considered invalid from the outset. Affected parties are therefore not bound by the contract and can, under certain circumstances, claim back payments already made.

However, this consequence does not automatically apply to all prohibited distribution systems.
For models that heavily depend on chance, such a clear statutory nullity rule is missing. Therefore, the invalidity cannot be generally applied to all cases.

If, however, a void contract exists, one is not obliged to make further payments or remain in the system. At the same time, the provider cannot invoke the contract to enforce claims.

The legal consequence is clear:

• No binding to the contract
• no obligation for further participation
• no effective claims by the operator

Customers’ Claims for Repayment

Anyone who has already paid money into a pyramid scheme can generally claim it back. The law ensures that participants do not have to bear their losses, but that at least a reversal is possible.

The typical process is simple:
The customer demands their paid money back and, in return, returns what they received, if possible.

It is important to note:

• Claim for repayment of amounts already paid
• Return of received goods or services
• no claim by the operator for payment of their services

In practice, however, enforcement can be difficult, for example, if the operator is no longer reachable or funds have already been redistributed. This is precisely where the advantage of legal support becomes apparent.

Administrative Penalties and Further Consequences

Violations of the regulations concerning pyramid schemes and similar models entail significant legal consequences.

Anyone who violates these prohibitions commits an administrative offense. Unless a criminally punishable offense exists, the violation is punished by the competent district administrative authority and can be punished with a fine of up to € 2,900.

Typical consequences are:

• Fines by the competent administrative authorities up to € 2,900
• Prohibition or restriction of further business activities
• civil law claims of aggrieved participants, in particular for repayment of amounts paid

Furthermore, criminal liability may also exist. If such a system is designed as a paid game with a chance of winning, criminal liability under the Criminal Code (StGB), specifically under Section 168a StGB, may apply. In this case, a judicial fine or imprisonment of up to six months is threatened.

In addition to the immediate legal consequences, the economic damage is also considerable. Companies and participants regularly suffer a massive loss of trust, which has long-term effects on business activities and market position.

Your Benefits with Legal Assistance

Pyramid schemes and gambling-like distribution systems often appear harmless or even lucrative at first glance, but in practice, they regularly lead to financial losses and legal problems. Precisely because the models are deliberately complex, many affected parties recognize the risks too late. A legal review quickly provides clarity here and prevents further damage.

An experienced lawyer will help you to correctly assess your specific situation, review existing contracts, and consistently enforce your claims. At the same time, they protect you from unknowingly becoming involved in a legally problematic system yourself.

Concrete advantages for you:

• Quick assessment of whether a prohibited system exists
• Enforcement of claims for repayment of amounts already paid
• Protection against further financial and legal risks

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Frequently Asked Questions (FAQ)

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