Ponzi scams resemble pyramid schemes where there is no true product or service being offerred in exchange for the investment. Also, like a pyramid, early "investors" will usually receive funds as a result of the later "investors" cash. ALL Pyramid Schemes are illegal. The swindles are often disguised as transactions in new and poorly understood investment instruments. They usually do not involve an actual sale of products or services.
A ponzi scam operates by using the funds from many investors to pay the first few. As the number of investors grows, and the supply of potential new investors dwindles, the Ponzi scam collapses under pressure of meeting the promised interest payments. Initial investors may receive interest payments but the vast majority end up losing their money.
A sucessful Ponzi scam usually depends on some of the following:
- Greed of potential investors.
- Promises that it is a surefire investment, even offering supposedly valid guarantees.
- Initial investors line up their closest friends, relatives or professional associates as new victims for the swindler.
- Apparent success as initial first few investors are paid.
- Investors are reluctant to admit they have been swindled and fear looking foolish for being greedy.
- Investors cling to the hope everything will work out for the better eventually.
How to avoid Ponzi scams
- Beware of promises of high, guaranteed profits.
- Avoid promotors who fail to provide clear and detailed explainations of their investment vehicles in writing.
- Obtain detailed, written information about the promoters' background and the offering.
- Be leery of deals that cannot be checked out in person.
- Resist the pressure to reinvest without seeing your profit.
- Look for unbusinesslike conduct or distruption of services.