If you decide to invest in something that promises extremely high returns with little to no risk, the investment may be a Ponzi scheme. These schemes get you to invest money, but the fraudsters do not put it towards another investment. Typically, the fraudsters take a portion and pay those who invested in the scheme earlier.
According to the U.S. Securities and Exchange Commission, Ponzi schemes get their name from Charles Ponzi, who started a postage stamp speculation scheme in the 1920s. Today, most Ponzi schemes require a constant flow of money to keep going.
Common qualities of Ponzi schemes
One of the most common qualities of a Ponzi scheme is that it promises high returns with minimal risk. But other signs of this form of investment fraud include the following:
- The promise of returns that are extremely consistent without fluctuation
- The requirement to get involved in an investment not registered with the SEC
- Involvement with sellers who are not properly licensed
- Lack of information about the investment is not readily available
You may also experience paperwork issues as you try to invest in a Ponzi scheme, typically in the form of account errors.
How to protect yourself
To avoid investing in a Ponzi scheme, always look for investments registered with the SEC. The person you work with should also be upfront and honest about how the investment works. Always trust your instincts and step away from an investment if something seems wrong or you do not feel completely comfortable working with the investment representative.