Know all about the business model of the Ponzi scheme, Pyramid scheme & the ultimate comparison Ponzi scheme Vs Pyramid scheme.
If you are planning to join any kind of multi-level marketing, you must have searched info about the main terms of the Ponzi scheme and pyramid scheme. This article is about the Ponzi scheme Vs Pyramid scheme. Read the complete article to find out the difference between network marketing and a fraudulent scheme.
A Ponzi scheme definition states that it is a type of fraudulent activity that involves luring new investors to take profits from the funds of those investors. The scheme tells the victims that they make the profits through selling products or by other genuine means. But, in reality, the new investors are the source of income of the pre-existing investors. A Ponzi scheme attracts new participants with promises of unbelievably high returns in a short period.
A brief history of the Ponzi scheme:
Before you know the Ponzi scheme Vs Pyramid scheme, you should know about the Ponzi scheme first. It has derived its name from a resident of Boston, Charles Ponzi. In the 1920s, he became infamous in the United States after launching a scheme that guaranteed a 50% return to investors. The original business proposal was a legitimate arbitrage of postage stamps coupons.
As he started making a profit, he deviated from the plan and started filling his own pockets as well as the pockets of the earliest investors from the money of the new joiners. Although he could pay the initial investors, eventually, the scheme dissolved, and so the later investors did not get their money back. This notoriety is responsible for the nomenclature of fraudulent schemes of the same nature as the Ponzi scheme. Let’s get to know all about the Ponzi scheme Vs Pyramid scheme.
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Common examples of Ponzi schemes
- JSG Capital Investments- Two men from California guaranteed high returns to investors in pre-IPO stocks. However, you’ll find no record of any actual investment ever made.
- Bernie Madoff- Bernie Madoff, a broker from Wall Street, ran a business in wealth management for almost 20 years. The Ponzi scheme defrauded the investors, and he made billions of money in this manner. Harry Markopolos revealed the true nature of the business and brought it to an end.
How to identify a Ponzi scheme?
Suppose you are wondering how to understand if a business is authentic or a Ponzi scheme, there are several ways to find that out. Ponzi schemes have some standard features that investors should consider as ‘red flags.’
- High returns of investments with no or little risks– Every single investment involves a certain amount of risk, low or high. But, when someone guarantees you high returns for your venture, you need to figure out if there is something suspicious or not.
- Unregistered investments- Ponzi schemes generally deal with investments not authorized with regulators of the Government. Registration is significant as investors can collect information regarding the company’s products, management, finances, and services. If the company is not registered, it is a clear indication that you should not trust them.
- Consistent positive returns- Investment prices tend to rise and fall every month, especially those that give comparatively high returns. An investment that generates steady positive returns despite altering market conditions is usually suspicious.
- Unlicensed sellers- State and federal securities laws need that investment firms and professionals be registered and licensed. Ponzi schemes have unauthorized individuals as the business is not legitimate.
- Complex or secretive strategies- If the company fails to give you detailed information about its strategy and face difficulty understanding the investments, it is better to stay away from such companies.
- Requests to rollover investments- When there are failures in receiving payment, something is fishy. Ponzi schemes often ask investors to “rollover” the money by promising higher returns.
- Paperwork issues- They will give you multiple excuses when you ask why you are not allowed to review important information in the form of documents. Also, inconsistencies and errors in account statements are vivid signs that they are not investing the funds as promised.
What is a Pyramid Scheme Stand for?
Let us start with a pyramid scheme definition to develop an in-depth knowledge of what it means. A pyramid scheme is one form of business model involving the recruiting of members by offering benefits or rewards or the introduction of new members into the scheme. As the recruitment keeps multiplying, after a point in time, making more recruitment becomes practically impossible. Therefore most of the members make almost no profit. Pyramid schemes have existed in different ways for at least 100 years.
We will also tell you about the Ponzi scheme vs Pyramid scheme.
The basic model and the concept of a Pyramid scheme:
- In a Pyramid scheme, the agency encourages candidates willing to join them to make a specific payment. In exchange for the money, the organization promises to share the money taken from future members with these new members. The only condition is that you have to recruit those new people to make profits from their investments. The directors (people at the Pyramid’s topmost position) also get a share of the payments. The directors are the ones who take home maximum benefits. For them, the scheme is lucrative even if they do not do any work.
- Such companies do not bother about manufacturing products or offering services. Without creating services or goods, they simply recruit members and make money. So, each level is comparatively more extensive than the level before it in the Pyramid scheme.
- The people who work for a pyramid scheme are asked to promote the company and bring new members instead of promoting or selling products.
- Eventually, the people belonging to the lower levels make no money out of it, only the members sitting at the top gain constant profits.
- When it’s time for the scheme to collapse, most members are at the bottom layers, with no chance to take any money of the pyramid scheme.
The relation between Ponzi schemes and Pyramid schemes
Now let us discuss the Ponzi scheme vs Pyramid scheme to paint a clear picture of the two schemes’ nature and model. People often get confused between a pyramid scheme and a Ponzi scheme, but they are not the same. Pyramid schemes include network marketing. This means each section of the Pyramid is allowed to keep a particular portion of the profit before passing it over to the distributors at the top of the chain. They fail only because of the lack of sufficient people.
Ponzi scheme, as opposed to the Pyramid scheme, functions through robbing one person to fill another man’s pocket. Early investors make huge profits with the money given by fresh investors. So, Ponzi scheme Vs Pyramid scheme– which one is worse according to you?
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Ponzi scheme Vs Pyramid scheme: a detailed comparison
We are here to explain about the Ponzi scheme vs Pyramid scheme. A pyramid scheme is similar to the fraudulent Ponzi scheme in some aspects. Like the Ponzi scheme, the pyramid scheme also relies on a wrong belief in an unrealistic financial reality, along with the hope of incredibly high return rates.
What are the differences between the Pyramid scheme and the Ponzi scheme?
Here are the significant points in the Ponzi scheme vs Pyramid scheme:
- A Ponzi scheme asserts that it relies on an esoteric approach to investment. It even attracts big investors and motivates them to make significant investments. Pyramid schemes openly explain to the distributors that the new investments will serve as the source of returns to the initial investors.
- In all Ponzi schemes, the main schemer functions as a ‘hub’ for the investors or victims. He interacts with all candidates directly to convince them. But, in a pyramid scheme, distributors who recruit new participants get direct benefits. In case he fails to introduce more people, the person gets no return for the investment made.
- A pyramid scheme, in most cases, collapses faster than a Ponzi scheme. This is because it needs exponential increases in the number of participants to continue the business. But, when it comes to the Ponzi scheme Vs Pyramid scheme, Ponzi schemes survive longer even if there is no new investor. They persuade the existing participants to make further investments.
How is a pyramid scheme different from multi-level marketing?
After going through the description of the Ponzi scheme Vs Pyramid scheme, you may wonder whether all multi-level marketing businesses are actually pyramid schemes in reality. Multi-level marketing is basically a strategic tactic that many businesses are using to convince their current distributors to welcome new candidates. They get profit by receiving a certain percentage of the sales generated by the fresh recruits. So, earlier distributors could earn money only by selling services or products directly. With MLM, they have one more source to bring home some extra profit: recruiting candidates.
This is the striking difference between multi-level marketing (MLM) & pyramid schemes. In MLM, more emphasis is given on the sale of services or products. In addition to that, inviting new members is also a strategy to make the business grow. But, the Pyramid scheme focuses mainly on finding new investors and not product sales. That is what made it unethical. So, research well before becoming a member of any multi-level marketing company as what seems to be a good network marketing plan may be a disguised pyramid scheme.
This was all about the Ponzi scheme vs Pyramid scheme. We leave it up to you to decide which one of these two is more harmful. However, we may conclude by saying that both are fraudulent practices in the Ponzi scheme vs Pyramid scheme to fulfill the selfish goals of a few people.