How Returns to Existing Investors Can Help Attract New Investment

A Ponzi scheme is an investment fraud involving the payment of purported returns to existing investors from funds contributed by new investors. Ponzi schemes typically promise high, risk-free returns and use aggressive marketing tactics to attract new investors.

The best example of a Ponzi scheme is Charles Ponzi's famous investment in the 1920s. In that scheme, participants were promised huge returns (up to 100% in 45 days) on investment in international postal reply coupons. New investors were lured by promised incredible returns and money from new investors was used to pay dividends to previous investors. Of course, no real investment was taking place, and eventually the scheme collapsed when not enough new money came in to sustain it.

Ponzi schemes can be very difficult to spot, as they often look like legitimate investments. They may even be registered with securities regulators.