| A ponzi scam is a scheme where initial investors are paid dividend from the money accumulated from new investors. It is similar to a pyramid scheme where new investors' funds are used to pay the earlier depositors. Ponzi scam typically
promises high rates of return at little or no risk to investors. Providing there are more new investors, a ponzi scheme may actually generate the promised returns to earlier investors. Infact, when the earlier depositors get their profits, many of them are tempted to reinvest in the scheme. The reinvested money is again used to pay depositors and helps in prolonging the scam. Sooner or later, due to the lack of any new investors and absence of any real business behind the system, there will be no money flowing into the scheme. As a result, there will be no more money available to pay back the investors and the scam will fail. A ponzi scheme will always be a scam. There are a few differences between pyramid scheme and a ponzi scam. In a Ponzi scam, scammers deal with the investors behind the scam directly. In other words, the Ponzi schemers have to acquire funds from new investors and distribute the money themselves. In a pyramid scheme, new investors are recruited by other investors. In fact, participants of a pyramid scheme need to recruit new members to earn money. More about Ponzi scam The scheme is named after Charles Ponzi, a clerk in Boston, who was one of the first to employ this scheme way back in 1920. He promised investors 50% interest (return) on investments in 45 days or 'double your money' in 90 days. He was able to scam about 40,000 people and rake in around $15 million in total.
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