If you start a Ponzi scheme, you commit a type of investment fraud that involves using funds collected from existing investors to pay new ones. Instead of investing these funds, you continue this cycle of paying new investors.
The U.S. Securities and Exchange Commission states that Ponzi schemes get their name from Charles Ponzi, a man who started a postage stamp speculation scheme in the 1920s. Typically, Ponzi schemes collapse when they cannot recruit any more new members or when large numbers of those involved start to cash out their earnings.
Common characteristics
You may face criminal consequences for starting a Ponzi scheme if you promise your investors high returns without little risk. Other common characteristics of these schemes include providing overly consistent returns, using secretive, complex investment strategies, promoting unregistered investments and running an unregistered investment firm.
Consequences for involvement
If you face charges for involvement in a Ponzi scheme, you may also face an investigation conducted by several agencies within the federal government, like the FBI and SEC. As a result, the penalties you face may include large fines, significant jail time and restitution. The charges for involvement in this type of fraud may also include charges for other types of fraud, like wire fraud, tax evasion or mail fraud.
If you receive charges for starting or promoting a Ponzi scheme, you may be able to argue you started a lawful investment opportunity, instead of trying to defraud your investors. In today’s sophisticated investment environment, a fine line often exists between a legitimate business opportunity and investment fraud.