What is a Ponzi scheme?
The Ponzi scheme is a fraudulent investment scam that promises investors high rates of return with low risk. The Ponzi scheme generates profits for early investors by acquiring new investors. This is similar to a pyramid scheme in which both are based on using the funds of new investors to pay sponsors earlier. (What is a Ponzi Scheme)
Understanding Ponzi-schemes (What is a Ponzi Scheme)
The Ponzi scheme is an investment fraud in which customers are promised high profits, with the least risk. Companies that engage in the Ponzi-scheme focus all their energy on attracting new customers to invest.
This new income is used to pay the profits of the initial investors, noted as profit from legitimate transactions. Ponzi-schemes rely on a continuous flow of new investment to provide profitability to old investors. When this flow stops, the plane falls apart.
The Panzi scheme is an investment fraud that pays existing investors money raised from new investors. The organizers of the Ponzi-scheme often promise to invest your money and you have little or no risk. But in many Ponzi schemes, fraudsters do not invest money. Instead, they use it to pay people who have previously invested and can keep some for themselves.
With little or no legal income, the Ponzee scheme requires a steady stream of new money to survive. This scheme collapses when it becomes difficult to recruit new investors, or when a large number of existing investors leave.
The Ponzi scheme was named after Charles Ponzi, who deceived investors in 1920 with a speculative postage scheme.
“Red Flag” Ponzi Scheme
Many Ponzee schemes have common features. See these warning signs:
1. High returns with little or no risk. Every investment has a certain level of risk, and investments that offer high returns usually have a higher risk. Be very skeptical of “guaranteed” investment opportunities.
2. Very consistent returns. Continuous investment. Be skeptical about investments that regularly produce positive returns regardless of overall market conditions.
3. Unregistered investment. Ponci schemes usually include investments that are not registered with the SEC or state regulators. Registration is important because it gives investors information about management, products, services, and company finances.
4. Unsold sellers. Federal and state securities laws require professional and investment companies to be licensed or registered. Most Ponsi-schemes include unlicensed individuals or unregistered companies.
5. Secret and complex strategies. Avoid investing if you don’t understand it or can’t get complete information about them.
6. Problems with documents. Errors in account statements can be an indication that the funds are not invested as promised.
7. Difficulty accepting payments. If you are not paid or have trouble withdrawing money, doubt that. The promoter of the Ponzzi-scheme sometimes prevents participants from offering higher returns for stays.
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