What Is A Ponzi Scheme?
A Ponzi scheme is a fraudulent investment program that pays existing investors with funds gotten from new investors.
A Ponzi scheme is an investment scam that promises investors high returns on their investment with little to no risk. The scam uses funds collected from more recent participants to pay existing participants.
The scam got its name “Ponzi” from Charles Ponzi, an Italian swindler and con artist who became known in the early 1920s for his money-making scheme. Ponzi launched a project that guaranteed investors a 50% return on their investment within 45 days or 100% within 90 days in a postal coupon investment. Instead of doing any business with the funds he collected, Ponzi paid initial investors with the funds from newer investors. The scheme went on for over a year before it crashed, causing many investors to lose their money.
Ponzi organizers depend on the influx of new participants to keep it going. They often structure the scheme to encourage existing participants to bring in new people, usually to earn even more returns. Because the organizers rely on the income from new participants to pay older participants, the scheme ultimately falls apart when it can no longer attract new people.
It is often difficult to identify a Ponzi scheme because different organizers often devise crafty new ways to lure people into it. Regardless, Ponzi schemes share a few characteristics in common, they include:
- A promise of high returns on a bit of risk
- A promise of never-ending returns regardless of present economic realities
- Participants can earn more if they bring new members.
- Organizers claim the investment strategy is a secret or too complex to explain.
- Investments are not registered with the Securities and Exchange Commission.
Ponzi Scheme Example
Easy Way is an investment scheme started in 2019 that promises investors a 30% return on investment within 30 days. Investors can request their funds at any time; however, requesting funds before the 30 periods requires the investor to forfeit the promised profits. Investors who bring in three new people within the 30 days duration get 10% extra. A year later, the Coronavirus pandemic hits, causing an economic downtrend. Investors in the scheme request their money, but because new people have not been joining, the organizers do not have enough money to refund their capital or returns. Soon, the organizers skip town with what’s left, and people never hear from them again.« Back to Glossary Index