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| Chart From: U.S. Securities And Exchange Commission |
Pyramid Scheme
In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants. The hallmark of these schemes is the promise of sky-high returns in a short period of time.
Pyramid scheme promoters may go to great lengths to make the program look like a multi-level marketing program selling legitimate products or services. But these fraudsters use money from new recruits to pay off early stage investors until eventually, the pyramid collapses. At some point, the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and people lose their money.
Typical "hook
Earn high profits by making one payment and finding a set number of others to become distributors of a product. The scheme typically does not involve a genuine product. The purported product may not exist or it may only be "sold" within the pyramid scheme
Interaction with original promoter
Must recruit new distributors to receive payments.
Payments
Sometimes none. New participants may enter scheme at a different level
Source of payments
From new participants – always disclosed.
Ponzi SchemeA Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and may keep some for themselves.
With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse.
Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.
Ponzi scheme "red flags"
Many Ponzi schemes share common characteristics. Look for these warning signs:
Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.
Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.
Typical "hook"
Earn high investment returns with little or no risk by simply handing over your money; the investment typically does not exist.
Payments
No recruiting necessary to receive payments.
Interaction with original promoter
Promoter generally acts directly with all participants.
Source of payments
From new participants – never disclosed.
