How To Recognize and Avoid Ponzi Schemes

Understand how a Ponzi scheme works: The mastermind collects money from investors for a nonexistent venture, and early investors are paid so-called interest from the cash provided by new investors. The scheme collapses when the initial investors want their principal back and there aren’t enough subsequent investors to cover it.

Question a plan that promises a much higher return on your money than you could hope to receive through the usual channels, like stocks, bonds, and certificates of deposit. If you don’t fully understand the investment, don’t invest until it’s explained in terms you can understand.

Be wary of the promise of a tidy monthly interest payment. Many Ponzi schemes use that promise as bait.

Watch out for Ponzi scheme’s cousin – the Pyramid scheme. This con gets people to buy into a distributorship where they market a particular product. The catch? The real money is made by bringing in new owners and taking a cut of their investment. Only a few people who got in at the start make money off all those who join later.

Check with the Securities and Exchange Commission or your state’s Office of Financial Regulation to see if the person who approached you is licensed and if the investment is registered. If it’s a foreign investment, check with the International Organization of Securities Commissions.