What’s the difference between a Ponzi scheme and a pyramid scheme?
A Ponzi scheme is an investment fraud that pays existing investors out of the funds collected from new investors. Ponzi schemes don’t usually generate any genuine earnings. The inflow of funds from new investors keeps the scheme going.
It is named after Charles Ponzi. He defrauded investors in the 1920’s as part of a stamp scheme.
A pyramid scheme where fraudsters attract participants to an “opportunity” and those recruits can make money by getting more people to participate.
The difference between Ponzi and pyramid schemes:
- Ponzi schemes: victims make an investment with the promise of future returns.
- Pyramid schemes: victims are given the “opportunity” to make money by recruiting new participants.
Watch out for these red flags and suggestions to avoid investment fraud:
1. You are promised high returns with little or no risk
In general, higher-risk investments offer higher potential returns, and lower-risk investments offer lower returns. This is known as the risk-return relationship.
When you buy investments like stocks, there’s no guarantee you’ll make money. And the risk of losing money increases with the potential return. Investments that are considered low risk typically have returns similar to GIC rates. If your expected return is higher than this, you’re taking more risk with your money. Learn more about the risks of investing.
2. They’re not registered to sell investments
Before you invest, check the registration and background of the person offering you the investment. In general, anyone selling securities or offering investment advice must be registered with their provincial securities regulator.
3. Get a second opinion
Be skeptical of unsolicited investment opportunities that you might receive over the phone, online or from acquaintances. Before you invest, call the Ontario Securities Commission or get a second opinion from someone you’ve confirmed is a registered advisor. You may also want to consult a lawyer or an accountant.
4. Take the time you need
Be suspicious of time-limited offers and high-pressure salespeople. If the investment is legitimate, you should not have to invest on the spot. Take the time you need to make an informed decision.