When you create an investment opportunity that pays investors with funds you collect from investors who get involved, later on, you initiate a Ponzi scheme. Ponzi schemes typically promise to invest money with the potential for high returns, but this result does not occur.
In the 1920s, according to the U.S. Securities and Exchange Commission, Charles Ponzi misled investors with a speculation scheme involving postage stamps. This is where Ponzi schemes today get their name.
How these financial schemes survive
Because Ponzi schemes do not generate income from investments, they must have a constant flow of new funds from investors to keep going. When the majority of investors start to cash out their investments, or when it starts to become difficult to find new investors to get involved, the Ponzi scheme will begin to fail.
Common characteristics of a Ponzi scheme
Most Ponzi schemes feature certain characteristics. These include promising investors high returns with little to no risk, providing overly consistent returns on investments and putting money into investments not registered with the proper regulators. Other characteristics include providing investment opportunities without needed licenses and registrations and not providing investors with payments when requested.
Initiating a Ponzi scheme or perpetuating one is a type of white-collar crime that can lead to serious consequences. If you get convicted for your involvement with a Ponzi scheme, you could face time in prison, the requirement to pay a large fine or the requirement to pay restitution to investors involved with the scheme.