A Ponzi scheme is an infamous fraudulent investment plan that promises parties financial gain after a large investment. While the original Ponzi scheme started differently, it ended up having to pay early investors using new clients’ investments. It eventually fell apart when there were no new clients to pay off old clients.
A pyramid scheme is a similar fraudulent investment plan that takes advantage of investors. The idea is that investors will continue to hire new investors, typically by selling a product or service and promising incentives and rewards, and these new investors will rope in even more clients. When no more clients are willing to invest in the product or service, the bottom of the pyramid falls out.
While both schemes take advantage of the willingness of new clients, people often wonder if either scheme is more legitimate than the other. Or are there any differences between the two? Here’s what you should know:
There isn’t much difference
Both a Ponzi scheme and a pyramid scheme are criminal acts that are used to take money from people. The key factor is that someone at the very top of each scheme is profiting from everyone else’s work and involvement. These originators often believe they are running a legitimate business.
It’s easy to believe that a business plan is for the better of people, but oftentimes it may be doing the opposite. You may need to know your legal options if you believe you’ve been involved in a fraudulent money scheme.