Social media can be an entertaining thing to do when you’re bored, scrolling endlessly at the interesting content people post. However, scammers also use social media as a means to trick their victims out of money. They come up with fake Ponzi schemes and advertise them on their Facebook pages. These scams dupe victims out of thousands of dollars on a daily basis, fooling more people than you might think. This is why it is important to know what Ponzi schemes are, the history of Ponzi schemes, and how to avoid them.
What Are Ponzi Schemes?
Ponzi schemes are a type of investment fraud that distributes money from new investors to existing investors. The organizers of these schemes promise that you will get your money back with little risk in return. However, the organizer of these schemes never invests their own money into the scam. Instead, they take money out of what the new investors invest into the scheme and give the rest to the existing investors.
The reason why these types of investments are considered schemes is because it requires constant investments to keep it up. Once new investors stop joining the scheme, the money stops coming in and the scheme completely falls apart. The existing investors stop getting cashback like they were promised, and the organizer flees before anyone can notice.
The History of Ponzi Schemes
In 1920, Charles Ponzi told investors that he was able to take advantage of fluctuating values in currency to purchase postal reply coupons at a discount. An international postal reply coupon was something that a sender of a letter could include in order to get a reply from someone in another country. Ponzi tried convincing his victims that he could purchase these coupons at a discount and sell them in the United States for what they were worth.
This would generate a generous profit that he promised to split among investors. He promised them half of the profit within 45 days of investing and 100% of the profit within 90 days of investing. Investors believed Ponzi’s word since he had a reputation of giving generous profits to other investors. Investors were begging him left and right to take their money, wanting to generate a generous income for themselves.
However, the scheme started crumbling down when Ponzi could only give profits from new investors to his existing investors. He was not actually generating an income from this scheme, but instead relied on new-coming investors to invest in these coupons. The Boston Post Newspaper started creating investigative reports on Ponzi’s scheme, which eventually led to a criminal investigation due to suspicions of mail fraud. On August 12, 1920, Charles Ponzi was eventually arrested.
Signs That You Are Dealing with a Ponzi Scheme
- There are promises of high returns with little to no risk. Investments are always associated with some sort of risk. The higher amount of money you put into an investment, the more risk there is in investing within that opportunity. Therefore, it’s important to be suspicious of investment opportunities that are advertised as guaranteed.
- There are constant positive returns. In a normal investment, returns are shown to go up and down over time. If an investment has only positive returns, this could be a sign of a Ponzi scheme.
- You are not being provided with promised payments. If you are being offered a higher return rate for not cashing out, then be suspicious of this investment.
- There are unlicensed sellers organizing the investment. By law, you need to be a licensed seller in order to run an investment opportunity. If someone is not licensed, that means they are breaking the law and are most likely a part of a Ponzi scheme.
- You are not being provided with enough information about the investment. If an organizer of the investment can’t provide you with proper information about what you are investing in, then it is most likely a Ponzi scheme.
- There are constant issues with paperwork. If there are account statement errors, this could be a sign that your money isn’t being invested like promised.
How to Avoid Ponzi Schemes
- Question the person about the investment opportunity to see if it’s too good to be true.
- Do your research before investing in a company.
- Don’t send your money to someone that you don’t know online.
- Ask to see written materials from the company you plan on doing business with.
- Hire a trusted advisor before interviewing with the firm.
- Avoid the investment if they are not giving you enough information.
- Make sure any certifications or licenses presented to you are not photoshopped with Social Catfish’s reverse image search down below.
Social Catfish is Here to Help You!
At Social Catfish, we want to help you verify the identities of those who might seem suspicious to you. If you have their name, email address, phone number, social media username, or image, you can reverse search and see who the suspected person was that you’ve been in contact with after reading about Ponzi schemes. If you were involved in a scam, make sure to report it to the FTC as well.