Ponzi Schemes: SEC’s Advice

A Ponzi scheme is an investment fraud that works on a deceptive model. In this model, rather than generating profits through legitimate investments, returns are paid to earlier investors using the capital contributed by newer investors. The scheme is named after Charles Ponzi, who was the person who introduced this deceptive model in the 1920s. They are investment scams that trick people into thinking they will make a lot of money in less time and with no risk.

This fraud and scam is still not eliminated from the system, and many people still get trapped in this scheme, thus losing their money. The scammers promise the investors huge wealth quickly, but they take the money themselves.


Risk Free, Contingency-Based Legal Representation. Free Consultation.

How Do Ponzi Schemes Work?

Ponzi schemes work through an unsustainable and deceptive investment model that is a scam. It usually relies on continuously recruiting new investors who invest more money and pay returns to earlier investors or participants. They typically promise high returns; early investors receive returns and use new investor funds.

Use New Investor Money

Instead of investing the money in legitimate business ventures, the scammer uses the funds from new investors to pay the returns on investment to existing investors. This creates an illusion that there is profit from the investments, which in reality is nothing but the money of the existing investors. Because of this illusion, people start believing in the scheme and investing more funds.

The Promise of High Returns

The scammer or fraudster running the scheme promises high investment returns for every investor. These ROIs are often far higher than what is achievable through legal investments. Such schemes may also claim to have a secret or foolproof investment strategy. This high ROI attracts more investors, which is how the money enters the system.

Play Video
Red flags in ponzi schemes

Early Investors Receive Returns

The initial investors, who were introduced to the fraud scheme by the scammer or through word of mouth, may receive the promised returns in the earlier periods. This builds credibility and trust and encourages new and old investors to reinvest and recruit more people.

NonStop & Continual Recruitment

The fake and fraud scheme relies on a constant influx of funds through new investors to generate the money needed to pay returns to earlier investors. The scammer or fraudster uses different tactics to entice potential and present investors, such as offering bonuses, hosting seminars, and similar sessions to promote the investment opportunity. These tactics build more trust among people, and many people get convinced of the scheme as it is an easy way to make money in less time.

Nonviable Model

All Ponzi schemes are not based on any legal or legitimate business generating profits. The scheme becomes failed and unsustainable as the new investors slow down or reach a point where it stops giving the promised returns to earlier investors. When such a point comes, the money in the system ends, and the scheme becomes unsustainable and is announced as a scam and fraud.

Failure & Collapse

The Ponzi scheme fails and collapses when the flow of new investors decreases, and the scammer cannot meet the high ROI demands of earlier investors. This is the tipping point. Many investors may lose their entire investment, and the scheme is exposed and declared as a scam and fraud.

History of Ponzi Scheme

The Ponzi scheme is a defrauding investment scheme that promises high profits to investors with little or no risk. An Italian immigrant Charles Ponzi in the United States became infamous because of this fraud scheme in the early 20th century. The Ponzi scheme's origins can be traced back to the 19th century when similar scam activities were carried out in different forms. However, Charles Ponzi's fraud investment scheme in the 1920s brought this scheme into the limelight, and thus the name became famous globally.

Charles Ponzi promised people in Boston that he would give them high returns by taking advantage of international reply coupons (IRC). It was a financial instrument that could purchase foreign postage at a lower and discounted rate. While the Ponzi scheme has continued to evolve in various forms over the years, awareness is crucial in protecting investors from falling into a trap in such fraudulent activities.

Ponzi Scheme Red Flags

The Securities and Exchange Commission highlights the following Ponzi scheme characteristics that show that the investment scheme is a fraud and scam.

Huge Returns With Low-Risk

Ponzi schemes offer a massive return with seemingly little or no risk of failure. This should always raise an investor's suspicion because higher profits and returns always come with increased risk in a legitimate business

Guaranteed Returns

When the business is legitimate, there are always no returns guaranteed. This is something obvious when making investments. Guaranteed returns signal that something is not right in the scheme. This was an obvious red flag that people ignored back then.

Unregistered Securities

Legitimate companies and businesses register investments with the SEC. Before investing, you must look up security on the SEC Edgar database. The Ponzi Coupon scheme was unregistered with the SEC, giving a huge red flag to this investment opportunity.

Secret Strategies

Charles Ponzi became highly secret his investment scheme when the Post Office pointed out that he could not make returns for investors using postage coupons.

Problems In Cashing Out

The scheme had problems and loopholes in the cashing out of money. When an existing inventory wanted to take the money out, they had to face many challenges as there were many stages they had to go through to get the cash. They may take a long time to fulfill a cash-out request, and they persuade an investor to leave their money in the system by promising even bigger returns later.

Target Trending Investment Schemes

The Ponzi scheme's red flag is that they use the latest trending investment as their hook for potential investors. Cryptocurrencies are in trend, and new Ponzi scheme cases involve cryptocurrencies.


Call us. We can answer
all your questions.

Cryptocurrencies & Ponzi Scheme

As the SEC stated in a recent investor alert, cryptocurrencies are the breeding ground for Ponzi schemes. This is because potential investors are often less skeptical of an investment opportunity when assessing something new. We have all heard stories about Bitcoin millionaires in recent years, which created some credibility for the idea that an investment in cryptocurrency could be worth doing and comes with incredible profits. A recent cryptocurrency Ponzi scheme ripped off investors who wanted to make money from a plausible arbitrage strategy.

A similar case happened in 2016, in which a federal court sentenced Trenton Shavers to 18 months in prison. He was sentenced to prison following the revelation of his Bitcoin Ponzi scheme. The Wall Street Journal explains that, at one point, Shaver owned 7% of all Bitcoin in the circulation system.

Additionally, Shaver's scheme bore several classic hallmarks of a Ponzi scheme. Since then, cryptocurrency Ponzi schemes have followed similar scripts and ideas, promising investors 10% to 40% returns. PlusToken is one of the famous cases and the most prominent cryptocurrency scams. This cryptocurrency scam collapsed in 2019 and raked in approximately $2 billion.

PlusToken used a pyramid scheme bonus to persuade their investors to get more bonuses if they recruited more investors. However, it's been a century since the Ponzi scheme fraud happened for the first time. But even today, these schemes are happening in different countries. People are investing and are facing huge losses when the scheme is announced as a scam.

Pyramid schemes are fraudulent and deceptive investment schemes that prey on unsuspecting individuals interested in investments and making quick money. This often results in defrauded investors losing their money. In a pyramid scheme, investors are promised high returns for recruiting more investors or participants into the scheme rather than through legal and legitimate investment business activities.

Investment Professionals & Investor Education

FINRA, the Financial Industry Regulatory Authority, is a non-governmental organization that significantly regulates investment professionals and promotes investor education worldwide. FINRA oversees brokerage firms and their legally registered representatives and sets industry standards. The organization also enforces rules to ensure ethical and fair practices within the financial industry. Additionally, FINRA is committed to educating investors, providing them with resources and information to make informed and safe investment decisions. FINRA strives to protect investors' interests and save the worth of the financial markets by promoting an accountable and transparent environment for investment professionals.

How to Get Out of a Ponzi Scheme

Suppose you find yourself trapped in a Ponzi scheme. In that case, it is important to take decisive action to protect yourself and your money. The first thing to do is to refrain from making any further payments or investments into that scheme or any similar scheme. Then you must gather all communication records, relevant documents, and other evidence of your involvement in that scheme. Report the fraud scheme to the relevant authorities of the state or country you are living in. These authorities include law enforcement, the Securities and Exchange Commission (SEC), or any other regulatory agencies which deal in that relevant field.

The next step is to seek legal advice from a professional firm or attorney with experience in financial scams and fraud cases. This will help you to get a better understanding of your rights, and it will also help you retrieve your investment from that fraud scheme. Inform and notify your friends and family about the scheme to prevent them from falling victim to similar fraudulent schemes. You need to educate yourself on financial scams and frauds. Always conduct detailed research before investing in any opportunity. Remember, early detection and intervention in such fraud schemes are important in minimizing the damage caused by these Ponzi schemes.

Contact Veach Legal Today

If you are a victim of investment scams and Ponzi schemes, you can always contact us for legal services. Our securities attorney at Veach Legal specializes in broker misconduct, securities fraud, fraud investigations, class actions, and arbitrations. Call us today to learn more about our services.

Small firm appeal. Large firm privilege.

Success History

We would love to hear from you.

828-398-8288 • [email protected]

Please enter your name.
Please enter a message.