SECP notifies regulations to prohibit Ponzi, pyramid schemes

The Securities and Exchange Commission of Pakistan (SECP) has introduced new regulations to prohibit Ponzi schemes, pyramid schemes, deceptive multi-level marketing (MLM) and unlawful referral marketing, tightening safeguards against financial fraud and misleading business practices.

The SECP has notified the Companies (Prohibition of Unlawful Activities) Regulations, 2026, establishing criteria to identify and prohibit such schemes across physical and digital platforms, including websites, mobile applications and social media.

The regulations apply to all companies, including foreign companies, and prohibit business models in which earnings are primarily generated through recruiting new participants rather than genuine product sales.

They also cover practices involving the use of funds collected from new investors to pay earlier participants, promises of unrealistic or guaranteed returns, excessive joining fees, compulsory inventory purchases and concealment of how investors’ funds are used.

The regulations further 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 featuring unclear contractual terms, unreasonable purchase requirements or multiple participation positions designed to generate recruitment-based rewards are also prohibited.

However, the SECP clarified that legitimate direct-selling businesses, in which compensation is primarily generated through actual sales to end consumers, would remain permissible.

The regulations also cover 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. The regulator may also initiate other enforcement proceedings, including winding up of companies under Section 301.

Commenting on the notification, SECP Chairman Dr Kabir Ahmed Sidhu said the regulations would 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,” he said.

The regulations were finalised following consultations with professional bodies, business organisations and other relevant stakeholders.

The SECP advised the public to exercise caution when approached with investment schemes promising unusually high or guaranteed returns, particularly those offering rewards for recruiting new participants. It also urged investors to verify the legitimacy of companies before committing funds.