A Guide To Understanding Ponzi Schemes

Ponzi schemes have been around for a very long time and are schemes that people commonly fall for. This is because many people are attracted to the idea of sowing benefits without putting in hard work. It is important to understand what Ponzi schemes are so that you will be alert and not fall prey to such schemes. Here is a guide to understanding Ponzi scheme.

What are Ponzi Schemes?

In layman's terms, Ponzi schemes are scams disguised as investments. Scammers convince their targets to invest their hard-earned money in businesses or funds that guarantee high returns. However, these are not real. Money is being generated when these scammers find other people to scam. It is a type of securities fraud.

The reason why Ponzi schemes have high success rates is that sometimes, scammers manage to pay investors. To prevent getting a bad name, scammers usually pay their early investors a portion of the money generated by new victims. When new investors see early investors getting paid, they believe these scammers and let down their guard.

How to Differentiate Ponzi Schemes

It is important to be able to differentiate Ponzi schemes so that you can avoid becoming a victim of one yourself. Ponzi schemes are not pyramid schemes. Pyramid schemes are known as multi-level-marketing (MLM) schemes. In MLM schemes, new members are charged and these new members are tasked to recruit even newer members to earn money. They have a different structure from Ponzi schemes although they may seem similar.

Ponzi schemes are not investment bubbles as well. Investment bubbles are cases of assets being priced at an extremely high price, with the price usually pushed up by demand. The market will then correct the price. Investment bubbles do not necessarily involve fraud. Although Ponzi schemes are different from pyramid schemes and investment bubbles, they have some similarities which may result in some people getting confused over them. This is also a reason why it may be difficult for some to spot a Ponzi scheme.

What to Do if You Suspect an Organization is Involved in a Ponzi Scheme

If you have analyzed an organization or a business, and your gut feeling is telling you that it is a Ponzi scheme, you should alert others. This can help prevent people from losing their hard-earned money which may be difficult to recover. You should always be careful when it comes to matters like these. You can also contact the Federal Bureau of Investigation (FBI), the Internal Revenue Service (IRS), or the Securities and Exchange Commission (SEC) to alert them.

Weltz Law Can Help with Scams and Fraud

Now that you understand more about what Ponzi schemes are, do you suspect someone close to you has become a victim of a Ponzi scheme? If this is the case, it will be best to contact an experienced lawyer who can help. At Weltz Law, our attorneys are knowledgeable in the securities litigation field and will be able to provide sound advice and represent victims. Feel free to contact us today for a free consultation.