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Ponzi schemes are fraudulent investment schemes where profits are distributed to early investors using the money contributed by later participants. In order to pay returns to previous investors, the program relies on the recruitment of new participants, giving the impression that this is a viable investment opportunity. The actual investment itself does not produce the promised profits; rather, the contributions of new investors do.
Charles Ponzi, who masterminded a well-known instance of the scam in the early 20th century, is honored by having his name attached to the scheme. Ponzi deceived people by believing they would make a lot of money investing in foreign postal reply coupons, when in fact he was utilizing the funds from new investors to repay the money from previous investors. Investors lost their money when Ponzi's scam ultimately crashed.
Ponzi schemes are both against the law and very unethical. They frequently can only be sustained for a short period of time before collapsing, necessitating the promoter to continuously entice new investors to pay off earlier ones. Ponzi scheme investors sometimes lose all or a sizable portion of their initial investment.
To safeguard investors and preserve market integrity, regulators and law enforcement organizations are in charge of observing and thwarting Ponzi schemes and other fraudulent investment practices.
