What is a Ponzi scheme?

What is a Ponzi scheme?

On Behalf of | Sep 22, 2022 | White Collar Crimes |

Investing is a way for people to grow their money, as opposed to just placing it into a savings account. While many investment opportunities are legitimate and can become lucrative when making smart decisions, Ponzi schemes are a type of fraudulent investment.

With Ponzi schemes, the administrator of the investment opportunity seeks out money from new investors, which they use to pay themselves as well as previous investors. The following signs indicate that an investment opportunity may actually be a Ponzi scheme.

Lack of registration

All legitimate investment opportunities have registration with the state or federal government. Registration ensures the investment is valid and that the process is compliant with relevant laws. A lack of registration is always a bad sign, as investors will lack access to essential information on the company providing the opportunity.

Challenges with payments

With legitimate investments, it should be easy to access payouts when appropriate. In most cases, the investor will contact the administrator, who will transfer funds in a specified manner. With Ponzi schemes, there usually is no money available for new investors, as it is being funneled back to the administrator and those who made initial investments. As a result, it can be nearly impossible to receive funds when they are due.

High return with minor risk

Risk is a factor in all investments. When the risk is high, you also have a chance of high returns. On the other hand, minimal risk investments yield lower returns, but provide investors peace of mind when it comes to their money. An investment that claims high return with little risk is typically too good to be true. Additionally, a guarantee of a high return is a major red flag.