Opportunities that require nominal investment but promise high rewards are certainly tempting. Although there are legitimate prospects out there, there’s always the risk of being taken in by a Ponzi scheme. In their search for quick, easy cash, countless investors have lost millions of dollars on Ponzi schemes. The following is everything you need to know about spotting and avoiding these scams.

What Is a Ponzi Scheme?

Named after the 1920s scammer Carlo “Charles” Ponzi, Ponzi schemes foster confidence in non-existent businesses by paying out large and rapid rewards to initial investors. These rewards are supplied by funds received from later investors.

While everything looks good at the outset, this system is unsustainable. With no regular or legitimate income, the non-existent enterprises behind Ponzi schemes are destined to fail. Investors who join the fray just before Ponzi schemes collapse lose both the promise of high returns and all monies they’ve put in.

Be Skeptical of Low-Risk, High-Reward Opportunities

The ideal way to avoid Ponzi schemes is by steering clear of all low-risk, high-reward opportunities that lack clear explanations for their greater-than-normal payoff potential. This is also true of low-risk, rapid-return opportunities. If something sounds too good to be true, it likely is.

Don’t Invest Until You Know Exactly How a Business Works

Whether you’re investing in a business, an idea, or a product, never part ways with your cash before you understand exactly how it works. Always be leery of investments that don’t allow would-be investors to ask a lot of questions. If the underlying strategies are deemed as being proprietary, too complex, or too secretive for explanation, hold onto your money.

Use Reputable Databases to Research Investment Opportunities

You should always do your due diligence before investing in any novel enterprise. There are many reputable databases for verifying the authenticity of companies and their claims. Maintained by the Security Exchange Commission, the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database is a free online tool for researching public filings from businesses.

You can also visit public forums for investors and social media sites to see if others have heard of an investment opportunity and to learn what their investment experiences were like. People who’ve lost money on Ponzi schemes often share candid info via free, web-based platforms.

Report All Suspected Scams

If you believe that you’ve been targeted by a Ponzi scheme, report it to the relevant authorities. You can submit reports to the Financial Industry Regulatory Authority (FINRA) and the SEC to prevent others from being scammed.

Why Ponzi Schemes Are Illegal

Ponzi schemes violate multiple consumer protection laws. They exist solely to defraud investors. To create scalable, believable opportunities, those who run Ponzi schemes often forge numerous documents and may be guilty of other crimes, including laundering, conspiracy, false filings with the SEC, and bank fraud.

Although reporting suspected Ponzi schemes to FINRA and the SEC can put continued recruitment to a stop, it’s important to seek the help of a seasoned criminal defense attorney if you’ve unwittingly been caught up in these activities.

Published by: Khy Talara