Ponzi scheme
An investment fraud that pays earlier investors with money collected from newer ones. It needs a constant flow of new money and tends to collapse when recruiting slows or many investors cash out.
The SEC defines a Ponzi scheme as an investment fraud that pays existing investors with funds collected from new investors. The organisers often promise to invest your money and produce high returns with little or no risk, but in many Ponzi schemes they do not invest it at all. They use it to pay earlier investors and may keep some for themselves.
With little or no real earnings, the scheme needs a constant flow of new money to survive. When it becomes hard to recruit new investors, or when a large number of existing investors cash out, the SEC says these schemes tend to collapse. The name comes from Charles Ponzi, who in the 1920s duped investors with a postage stamp speculation scheme.
The SEC’s red flags: high returns with little or no risk, overly consistent returns whatever the market does, unregistered investments, unlicensed sellers, secretive or complex strategies, paperwork errors, and difficulty receiving payments. It adds that promoters sometimes try to stop participants cashing out by offering even higher returns for staying put.
Where it shows up
- Ponzi schemes and high-yield investment programmes · A rate of return that fails arithmetic, paid from the deposits of the people who joined after you.
- Affinity fraud · A promoter who shares your church, your ethnicity or your profession is using that membership as the entire sales pitch, not a coincidence.
Sources
- Ponzi Scheme. US Securities and Exchange Commission (Investor.gov). Accessed 2026-10-10. Supports: The definition, the reason for collapse, the origin of the name and the list of red flags.