What is a Ponzi Scheme?

A Ponzi scheme is a kind of investment fraud wherein a company pays returns to its investors using the capital of new investors, instead of using real profit. How the money goes around is inherently flawed, because the company will need a constant flow of new investors to keep the investment alive.

The company is aware of this, making a Ponzi scheme one of the most fraudulent investment scams today. Companies deliberately attract new investors by promising them high returns with very little risks. Once the investment collapses, only the company and maybe even a few of its first investors are the ones who will get the returns, while everybody is left behind.

Before you know it, the money you worked hard for is gone.

Because of the deliberately fraudulent nature of the investment, it may be hard to spot. The company will surely make ways to make the investment appear legitimate. It is a good thing that the website of Erez Law has enumerated some of the signs that an investment is a Ponzi scheme:

  • High returns with no risks – Real investments with high returns are usually risky, so if a company has promised that their investments have high returns without the risks, be wary.
  • Unusual consistency in returns – Real investments have fluctuating values.
  • No registration and license – Real investments require registrations and real companies require licenses.
  • Secrets and unnecessary complexity – Real companies will make sure that you understand what you are getting into, so if a company seems to be bombarding you with technical words and hard to understand documents, be wary.
  • Paperwork problems – Real companies will provide clear, consistent, and error-free paperwork regarding your investments, so be cautious of a company that is reluctant when it comes to paperwork transparency.
  • Trouble with payments – Fraudulent companies will encourage you to reinvest money into the scheme, but the real purpose here is to keep the investment from crashing because of the lack of new investors.

To protect your hard-earned cash, it is best to avoid Ponzi schemes, or any fraudulent investment operations, by making sure that the company and investment are legitimated by proper documents and registrations. It is also important to fully understand the investment, because knowing your stuff is the best defense against fraud.

 

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