The Securities and Exchange Commission of Pakistan (SECP) has introduced new regulations to prohibit Ponzi schemes, pyramid schemes, deceptive multi-level marketing (MLM) arrangements and unlawful referral marketing activities. The regulatory framework is intended to strengthen public protection against financial fraud and misleading business practices, particularly schemes that generate income primarily through recruiting new participants instead of selling genuine products or services.
The regulator has notified the Companies (Prohibition of Unlawful Activities) Regulations, 2026, establishing criteria for identifying and prohibiting such business models. The rules cover activities conducted through traditional physical channels as well as digital platforms, including websites, mobile applications and social media. Their scope reflects the changing methods through which questionable investment and marketing schemes can reach potential participants and collect funds.
The regulations apply to all companies, including foreign companies operating within the scope of the framework. They prohibit business models in which the main source of earnings is the recruitment of additional participants rather than genuine sales to end consumers. This distinction is central to the new rules because legitimate product-based businesses can use direct selling and referral arrangements, but compensation structures based primarily on continuous recruitment can expose participants to financial losses.
Under the regulations, schemes that use money collected from new investors to pay earlier participants are prohibited. This is a defining feature of Ponzi-style arrangements, in which payments to existing participants depend on funds entering the scheme from new investors rather than revenue generated through legitimate business activity. Such models can become unsustainable when the flow of new participants or funds slows down.
The rules also address schemes that promise unrealistic or guaranteed returns without a genuine business basis. Offers of unusually high profits, particularly when presented as assured or available with little risk, can mislead individuals into committing money without properly understanding how returns are generated. The SECP’s framework seeks to restrict business models built around such claims and other misleading representations.
Excessive joining fees and compulsory inventory purchases are also covered. Some recruitment-based arrangements require participants to pay substantial amounts to enter a business or purchase products before they can qualify for commissions and other rewards. The new regulations prohibit such practices where they form part of unlawful business models.
The framework further addresses the concealment of how investors’ funds are collected, managed and used. Companies operating legitimate businesses should be able to explain their revenue sources and the purpose of funds received from participants. Schemes that obscure the movement or use of collected money can make it difficult for individuals to assess the risks involved and determine whether the promised business activity is genuine.
Products with little or no genuine market demand are another area covered by the rules. The regulations prohibit arrangements involving misleading income or product claims, inadequate refund or buy-back facilities, and the sale of unregistered, unapproved or illegal goods. These provisions address business models in which product sales may be used to give the appearance of a legitimate commercial operation while the actual financial incentive remains focused on recruitment.
The SECP has also included pyramid schemes involving unclear contractual terms, unreasonable purchase requirements or multiple participation positions designed to generate recruitment-based rewards. These arrangements can make it difficult for participants to understand their obligations, the conditions for receiving payments and the actual basis on which commissions are calculated.
The regulator has clarified that the new rules do not prohibit legitimate direct-selling businesses. Companies whose compensation arrangements are primarily based on actual sales to end consumers will remain permissible, provided their operations comply with applicable requirements.
This distinction separates genuine commercial activity from recruitment-dependent schemes. In a legitimate direct-selling model, revenue is generated through demand for products or services among customers. By contrast, an unlawful pyramid arrangement depends mainly on bringing in additional participants and collecting payments from them to sustain rewards for earlier members.
The regulations also cover existing schemes that display characteristics of unlawful activities, regardless of whether they operate through physical outlets, websites, mobile applications or social media accounts. Companies are prohibited from promoting, conducting or facilitating activities falling within the prohibited categories. This means that changing the channel through which a scheme operates does not place it outside the regulatory framework.
The inclusion of digital platforms is particularly relevant as businesses increasingly use online channels to advertise investment opportunities, recruit participants and receive payments. Websites and mobile applications can make it easier for operators to reach people across different locations, while social media can be used to circulate income claims and recruitment messages. The SECP’s rules establish that prohibited business practices remain subject to regulatory action even when they are conducted electronically.
Companies found violating the regulations may face penalties under Section 512(2) of the Companies Act, 2017. The provisions can also apply to directors and officers associated with the companies involved in unlawful activities. The SECP may initiate additional enforcement proceedings, including action for winding up companies under Section 301 of the Companies Act.
These enforcement measures provide the regulator with options to address companies involved in prohibited schemes. Depending on the nature of a violation and the applicable legal provisions, action may extend beyond the company itself to individuals responsible for its management and operations.
Commenting on the notification, SECP Chairman Dr Kabir Ahmed Sidhu said the regulations were intended to strengthen safeguards against deceptive business practices and financial exploitation. He said the regulator’s objective was to promote legitimate business activities and protect the public, including people approached through unlawful schemes operating on digital platforms.
The regulations were finalised following consultations with professional bodies, business organisations and other relevant stakeholders. The consultation process provided an opportunity to consider the concerns and practical implications of the proposed framework before its notification.
Alongside the new regulations, the SECP has advised the public to remain cautious when approached with investment opportunities promising unusually high or guaranteed returns. It has particularly warned against arrangements that offer financial rewards for recruiting additional participants, as these structures may indicate an unlawful scheme.
The regulator has also urged individuals to verify the legitimacy of companies before committing funds. Checking a company’s legal status and understanding its business model can help potential investors assess whether an opportunity is connected to genuine commercial activity. Individuals should also examine how returns are generated, whether products have actual market demand, what contractual obligations apply and whether clear refund arrangements are available.
The new framework establishes a broader regulatory basis for addressing Ponzi schemes, pyramid marketing and deceptive referral-based businesses in Pakistan. By covering both physical and digital operations, the SECP aims to prevent companies from using different platforms to promote business models that depend on recruitment, misleading financial promises or the misuse of funds. The distinction between genuine product sales and recruitment-driven earnings will remain central to determining whether a direct-selling arrangement is permissible under the 2026 regulations.
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