Ponzi schemes posing as investment companies have consistently been on the rise this past few weeks. With more people losing their money every day to Ponzi schemes, it is a call for serious concern. Common selling points include getting ridiculously high returns in a short period or bringing people to invest to get guaranteed returns.

Ponzi scheme vs pyramid scheme

Both schemes are types of fraud but are not mutually exclusive, as both schemes can be applied together for a successful investment scam. Even though there are promises of getting ridiculous ROIs, more people are still needed to carry on the cycle. However, there is still a distinction between them.

Ponzi scheme: involves investing particular money with a promise to receive a higher percentage at a later date. For example, we see “put 50000 to get 100% ROI in two days” or a money doubling scheme where you’re assured double of your money in a few hours. In a bid to make quick money, many people have fallen for these scams.

Pyramid scheme: this scheme, on the other hand, deals with bringing people to invest (popularly known as downlines or referrals) to guarantee returns. You hear things like “bring two people, and the two people will also bring two people” and so on. Personally, once I hear investments schemes like this, I ignore them. The way people rush into this type of investment scheme needs to be studied.

How to identify an investment scam.

  • Guaranteed high returns: any investment that guarantees abnormally high returns within a short period is a scam. Market fluctuations have made it difficult to get a ‘guaranteed’ ROI, whether big or small.
  • Low or no risks: there is always a risk when you invest, due to the market fluctuations. It could be low, medium, or high-risk level. If an investment assures you that there are no risks involved, then it’s something to watch out for.
  • Unregistered investments: investment companies are often registered under SEC, which gives them the license to operate. If they are not a registered company under SEC, then it’s a no-no.
  • Secretive, complex strategies: if you don’t understand what the business is all about or how they tend to generate returns, stay away. Warren Buffett once said, “never invest in a business you don’t understand.”
  • Need for more investors: Ponzi schemes thrive with people’s money. The more people there are, the more the funds. If you’re asked to bring other people for rewards or increase in ROI, then there’s something wrong.

How do we reduce the risk of falling victim to these scams?

It all boils down to research. You need to research the company and understand what its business model is. Before you make any investments, you need to ask yourself these questions: Are they registered? Do they have a verifiable office? Is there pressure to invest with them or miss out? How do they make a profit? If you have to pay into the CEO’s account, then there is a problem. These are major potholes you need to look into before putting your money anywhere.

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