A Ponzi scheme is a white-collar crime. As is common with this type of crime, the focus is on financial gains for the person perpetrating the scheme. A Ponzi scheme, according to the U.S. Securities and Exchange Commission, is a type of investment fraud.
It involves an organizer approaching investors with the promise to invest their money and provide high returns on that investment. They claim that there is little or no risk to the investment. The name comes from the original person who carried out such a scheme, Charles Ponzi.
Characteristics
Because investors will almost always lose everything that they invest in a Ponzi scheme, it is helpful for them to know the characteristics or signs of such a scam. To being with, the promises of little to no risk are very unusual when it comes to investing because investments are naturally risky.
It is also typical for the organizer to be very secretive about the investments and other details of their company. They may not have licenses and registrations required by law.
Finally, returns that an investor does get will often be very unreliable and inconsistent. It is also common to have trouble getting payments.
The Problem
The reason why a Ponzi scheme is a crime is that the organizers usually use money from late investors to pay new investors. They do not actually make any investments. In time, they will find it hard to recruit new investors, and the whole scheme implodes because there is no longer a source of new money with which to pay investors.
It is also common for the organizers to skim money from every investor. This is what makes this a lucrative plan. They can take a cut of every investment, and when the investors stop signing up, they often disappear. Because the investment company was not legitimate, investors have no protection or ability to get their money back.