How to Recognize a Credible Investment Company from a Ponzi Scheme

The Internet is making our life faster. These days, thanks to the Internet we are able to purchase goods from the other side of the world in a matter of minutes. We can also finalize a deal with a simple click or get to know someone, we would probably never have met otherwise. Also expanding are the opportunities and offers of making investments. These could potentially lead to a decent passive income. However, not every company is credible and as the number of offers rises, so does the risk of a scam. Of course, it’s useless to be afraid of something in advance.

It’s better to keep your eyes open, thoroughly check each company and only then take action.

In this article, using my online business and investment experience, I would like to present you a couple of ways to uncover a fraudulent investment company and what are the differences between a legitimate and legal investment opportunity and a fraudulent Ponzi scheme.

What to Imagine When Someone Says Ponzi Scheme?

In short, it’s a fraudulent act that works just like a classic airplane game. The system was named after Charles Ponzi, a con man with Italian roots, who lived in North America at the beginning of the last century.

Investors get interested in amazing promises and high returns within a short time.

This system operates on the principle, where investors invest their own money in the company for promised high returns. This should be achieved through their investment. However, the owner of a company doing business using the Ponzi principle does not invest the money. He keeps part of the money for himself and pays the rest to a handful of lucky investors, who joined the pyramid among the first.

The only sources of income of a fraudulent investment company are investments of investors. The company uses this money to pay out profit. When the influx of new investors stops, the company goes bankrupt. The con man keeps the money of his clients and the clients lose their money for the most part. A Ponzi Scheme is usually severely punished. The owner of such fraud can be prosecuted.

The most commonly used system that works on the Ponzi scheme principal is HYIP – a high yielding but high-risk system.

I have written a separate review of the Ponzi Scheme and the Pyramid Scheme. If you would like to know how these schemes work in real life, read this article.

How to Recognize a Ponzi Scheme from Transparent Investment Opportunities?

Charles Ponzi offered in Boston to double your investment within 3 months, which of course is complete nonsense. The secret was allegedly in foreign postage stamps – buy them in Europe, sell them expensively in the US. He was able to collect about ten million dollars within 6 months.

Even today there are people, who see him as a shining example, who use the Internet to their advantage and can easily scam novices. How do you protect yourself from them?

1. A Credible Investment Company Has Nothing to Hide; A Ponzi Scheme Hides Everything

A company which has a good business results likes to show/ display them. It won’t hide its owner from the world, it will offer a detailed presentation or charts and tables, from which it is generally fairly apparent, how well the company is doing in the market long-term and it will also clearly lay out what it is doing with the money from its investors. It is generally quite easy to find information about the people, who run the company. You are able to find pictures, videos, and articles relating to the company in the national press. In short, you will be able to find an actual proof, not just snippets of information about the company.

Ponzi schemes tend to be the exact opposite of this. Not only is there a lack of verifiable information, but if you find that pictures representing the „international company“ are actually just downloaded from the Internet, the company headquarters are in a Caribbean tax haven, or worse –  if it is a shell company,  whose offices share their address with another 500 virtual companies, you certainly won’t feel encouraged to put your trust in this kind of company at all.

Ponzi Scheme likes to exaggerate and offers only vague information that doesn’t make sense as a whole. It’s difficult to get information about this mysterious businessman behind it all, yet he should be incredibly rich and well-known in the investment world. The history of the company is practically not existent.

Be mindful of the fact that just because an investment company has real headquarters and its owners are easily identifiable, it does not automatically mean that it is a credible company. Today’s scams are so sophisticated that their owners have no issue showing themselves in the public and organizing big conferences or press events, as was the case with the Zeekrewards and Banners Broker Internet projects. Unfortunately, I was also caught in these fraudulent investment opportunities.

Zeekrewards even had actual offices in the US and Banners Broker organized various world conferences. Both companies robbed tens of thousands of people. Luckily the authorities dissolved them.

2. Ponzi Scheme Offers Big Returns Within Short Time

Become a millionaire within a couple of weeks. OK, you don’t see many banners like this anymore, but the fact is that a credible and legal investment opportunity is a marathon. Your investment will grow within a couple of years; it’s the waiting that will produce the extra money.

Each investment carries with it at least some risk. If you want to invest with almost zero risk, but minimum returns, you can put your money in the bank savings accounts.

However, a Ponzi Scheme doesn’t mention the risk at all, quite the contrary, it tries to convince potential investors that they will soon get their investment back and that the returns will be quite large. You will get tens or even hundreds of percent extra in a short time, so you would be dumb not to invest. They claim that you have an advantage over other potential investors and that luck is on your side. Zero risk and all the profit, but you have to act now because this evening or even tomorrow morning will be too late. You wouldn’t want someone to get ahead of you, would you?

In this day and age, guaranteed profits are generally in single-digit percentages. The risk (i.e. non-guaranteed) investments are in the lower tens of percent. From time to time,  you may earn tens or even hundreds of percent on an investment. However this is more likely to be an exception, and most definitely could be considered to be very lucky (basically it’s like playing the lottery). If someone offers you a guaranteed 150% annual appreciation on your investment, just for turning your computer on and off, it’s definitely suspicious. One of the suspicious activities I would like to focus on, are the different cryptocurrency scams.

Cryptocurrency scams have been on the rise recently. If you want to understand more about this kind of scams, read my article: 7 Tips on How to Uncover a Cryptocurrency Scam where you will read about the various signs which may help you differentiate between a legitimate cryptocurrency from a scam.

3. Legitimate Investment Companies Are Sanctioned by the National Bank

Anyone who wants to trade shares must be licensed by the national bank. If the owner of an investment company does not state this information, you should find it on the official webpage of given national bank. If the company is not on the list of license holders, it is most likely not credible. All investment companies are supervised by the state, because it is required by the legislation.

Ponzi scheme is different. No one approved it, no one is governing it, there is no regulation, no national authority lists it anywhere, the headquarters are usually on the other side of the world and its origin is difficult to trace.

Investment companies in individual states are subject to all kinds of regulations to adequately protect their clients. It is therefore a controlled activity, for which not everyone can get a proper license.

4. Profits from a Ponzi Scheme Are the Same Regardless of Market Development

No market in the world will always behave the same way. It’s the very nature of capitalism. There are different fluctuations, crises, periods of major growth and periods of losses; none of which can be predicted in advance with good accuracy. Therefore, a credible investment company anticipates all possible outcomes and does not guarantee big returns in a short time. On the contrary, in the beginning you might earn a lot, then after two years your portfolio might lose part of its value only to regain it after some time. Investments are a combination of a long-term effort and careful monitoring of changes in the European or the world markets.

Only a Ponzi scheme guarantees profit regardless of economic crisis and changes in the values of precious metals or other market commodities. This is clear economic nonsense. Although, it sounds good and perhaps this is why so many people join the system and then they lose money.

5. A Credible Company Offers Actual Returns; a Ponzi Scheme Focuses Mainly On The Recruitment of New Members

Are you required to recruit new people for a project? As long as new members are joining the particular project, money is actually coming in and the company is thriving. But in reality, when the influx of new investors stops, the company finances dry up, and it is likely to go bankrupt eventually. Meaning that all money invested is lost. The workings of a Ponzi scheme – financial pyramid are quite simple: The money is there only for people, who joined the system at the beginning. The company does not invest the money of its investors; there is practically zero profit. With the exception of the deposits of the investors, there is and never will be any additional capital.

Mutual funds, bonds, stock and real estate trading, all of these have one thing in common. Credible investment companies will offer you real appreciation of the money you invested. In short, they will invest in something and definitely not pay you from the recruitment of new members.

6. Ponzi Scheme Will Not Tolerate Inquiring Questions

If the owner of an investment company is unwilling to provide details about the functionality of their system and replaces these questions with eye-catching slogans and headlines instead, they are most likely trying to hide something. So, before investing your money in any company, be sure to ask some questions like…

How does their system work? What’s their investment plan? How is the investment secured? etc. It will cost you nothing to ask questions, and it may help you getting over your initial doubts. However, if the owner is unable to answer your questions, or they are clearly avoiding answering any and all inquiries about the workings of the company, then it would be fair to suspect that something is wrong.

If you don’t quite understand some of the investment aspects, ask for a detailed explanation. Follow the advice of Warren Buffett, when he says that you should never invest in something you do not completely understand. It is best to avoid a company promising you big returns within a short time, yet the company is not able to explain how it intends to generate the profit.

A few inquiries should give you a clearer picture. A credible and transparent company won’t have any issues answering your questions fully and to your satisfaction, whereas a Ponzi scheme will avoid, conceal, exaggerate and fabricate things.

I generally ask questions like: What’s the cash flow of the investment company? Where does the money come from? How does the company generate profit, and how does the company pay its investors? If you discover that the only source of income of the investment company are investor deposits, then congratulations! You have almost certainly discovered a Ponzi scheme.

7. A Credible Company Will Happily Issue Certificates

A Ponzi scheme has other shortcomings, too. For example, it does not issue any contracts or receipts.

When buying a flat, you usually have to take out a mortgage; when you start a new job, you have to sign a contract; both are quite complex administrative procedures. A Ponzi scheme, however, will not require this, simply because administrative procedures are not something they concern themselves with. At the same time, should anyone with legal experience look closely into the workings of a Ponzi scheme, it would pretty much immediately become clear, that this is not a legitimate project. In principle, the less paperwork, signatures and contracts, the better it is for the Ponzi scheme. Ideally, there would be no documentation at all, and any evidence tends to get destroyed, so that if the authorities should investigate, there is nothing they can use as evidence.

Conclusion

You should enter the world of investments slowly and with prudence. As they say, measure twice, cut once.

You definitely won’t earn a million dollars in a week like in a lottery. We can’t expect great fortune to simply appear out of nowhere. You have to know the market, anticipate problems and have smart solutions ready at hand to make a profit.

A trusting investor and a greedy con man; a tale as old as mankind itself. So don’t repeat the mistakes of the past. Easy profit without any effort or hard work simply does not exist. If anyone promises it, he is interested more in your savings than a mutual plan of getting rich together.

Be careful when selecting investment companies in order not to lose your money. There are many who lost their life savings by investing in Ponzi schemes.

I also recommend reading a discussion forum you may find additional interesting information on the topic.

If you already have some experience with a Ponzi scheme or some kind of fraudulent investment opportunity share it and write to the discussion. 

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George H.

My name is George and I currently work from home as a freelancer for a PR agency selling advertising. I also freelance as an online marketer for an e-shop, and I am actively involved in creating this website. I am always looking for interesting opportunities on how to make money online. I share my findings with my readers on this website. I consider this to be my hobby. I hope, that you can find some legitimate work from home, or perhaps you might be able to earn a little extra money.