SECP notifies regulations against Ponzi, pyramid schemes

New regulations define prohibited investment and recruitment-based schemes, covering companies operating through physical and digital platforms. The Securities and Exchange Commission of Pakistan (SECP) has notified the Companies (Prohibition of Unlawful Activities) Regulations, 2026, establishing criteria to identify and prohibit Ponzi schemes, pyramid schemes, deceptive multi-level marketing (MLM) and unlawful referral marketing. According to the SECP, the regulations apply to all companies, including foreign companies, and cover unlawful schemes operating through physical and digital channels, including websites, mobile applications and social media platforms. The regulations identify several prohibited practices, including generating income primarily through recruitment rather than genuine product sales, using funds from new investors to pay earlier investors, promising unrealistic or guaranteed returns, imposing excessive joining fees or inventory purchases, and concealing the use of investor funds. They also prohibit schemes involving products with little or no genuine market demand, misleading income or product claims, inadequate refund or buy-back arrangements, and the sale of unregistered, unapproved or illegal goods. Pyramid schemes involving unclear contractual terms, unreasonable purchase requirements or multiple participation positions designed to generate recruitment-based rewards are also prohibited. However, legitimate direct selling businesses, where compensation is primarily derived from actual sales to end consumers, remain permissible. The regulations also apply to existing schemes exhibiting characteristics of unlawful activities, regardless of whether they operate through physical or digital channels. Companies are prohibited from promoting, conducting or facilitating such activities. Violations may attract penalties against companies, directors and officers under section 512(2) of the Companies Act, 2017, alongside other enforcement measures, including winding up under section 301. Commenting on the notification, SECP Chairman Dr. Kabir Ahmed Sidhu said, 'These Regulations strengthen safeguards against deceptive business practices and financial exploitation. Our objective is to promote legitimate business activities and protect the public, including from unlawful schemes operating through digital platforms.' The SECP said the regulations were finalised following consultations with professional bodies, business organisations and other relevant stakeholders. The regulator also advised the public to exercise caution when approached with schemes promising unusually high or guaranteed returns, particularly those offering rewards for recruiting new participants, and urged investors to verify the legitimacy of companies before investing.