What is a Ponzi scheme?
A Ponzi scheme is an illegal investment scheme. Earlier investors are paid with so-called “returns” from the money that newer investors contribute.
Organisers of Ponzi schemes often trick new investors by promising investment opportunities that generate high returns with little or no risk. Investors may be asked to bring in a certain number of new investors in order to take part in the investment. Often, family and friends are drawn into take part in the scheme. They contribute money which they believe will be invested in a company, but is actually used to pay earlier investors as “returns.”
This scheme technique is named after Charles Ponzi who duped thousands of people in the USA in the 1920s.
Why do Ponzi schemes collapse?
Ponzi schemes can continue as long as new investors are misled, to the point of being deceived into contributing enough money.
When it becomes difficult to bring in new investors, or when a large number of investors ask to cash out or claim their investments, Ponzi schemes will collapse because they have little or no legitimate earnings, especially as the number of ‘new’ investors begins to decline.
Red Flags of a Ponzi Scheme:
- Low risk and high returns
- There is no “guaranteed investment opportunity”. Every investment is risky and higher returns usually involve more risk.
- Offers regular and almost fixed returns depending on the investment amount
- If an investment generates regular, positive returns despite overall market conditions, it may be too good to be true. Investment values tend to go up and down over time, especially those with the potential for high returns.
- Unregistered and unlicensed
- Ponzi schemes are typically not registered with government regulators and involve unlicensed individuals or unregistered firms.
- Registration is important because it provides investors with access to key information about the company’s management, products, services and finances. Never accept the claim that you cannot review information about an investment in writing.
- Difficulty receiving payments
- Ponzi scheme organisers often encourage investors to “roll over” investments and promise higher returns. Be suspicious if you have difficulty cashing out or receiving payments on your investment.
When considering an investment, ask yourself:
- Do I have enough information about the company?
- Do I have access to information and understand the investment fully?
- Do I understand the risk involved compared to the potential return?
- Is there a clear explanation how returns are calculated?
- Is there a systematic process how investors can cash out investments at anytime?
- Do I know who or where to go to for help if anything goes wrong with the investment scheme?
Avoid investments you do not understand or for which you cannot get complete information.
To better understand how to make successful investments, take part in our Financial Education programme. If you would like to talk about investments you are considering or have questions regarding financial decisions, please feel free to contact Enrich at 2386 5811 or via email email@example.com. We are open Monday to Friday, 10am until 6pm, or on Sunday from 1pm until 5pm.
Also find more information on our Resources for Migrants page
Information source: U.S. Securities and Exchange Commission
Victoria Ahn, Enrich HK