It’s an old saying that it ‘takes money to make money’, and for business this is often very true – but knowing when, where, and how to invest your funds is definitely not as simple as you might think. In 2022, the FBI reported that $10.3 billion was lost to online fraud, and investment scams were topping the list of the fraud type that businesses were most concerned about. We’re going to look at some of the most common investment scams, the ones that you might think sound legitimate, or look as if they could offer a good deal – but are not going to give you the results that you want and should be aware of and avoid.
Ponzi Schemes: What are they?
A Ponzi scheme, one the most common investment scams, is essentially a pyramid scheme that promises investors that they will get rich quickly – usually advertising the investment as low risk/high return. The structure sees existing investors paid with funds collected from new investors, but because there are little to no legitimate earnings from the scheme, it requires a constant flow of new money and new investors to survive – and if a number of investors cash out, then the scheme will often collapse, leaving those who haven’t cashed out with nothing.
What are Red Flags to Identify a Ponzi Scheme?
- Little or No Risk, with High Returns: No investment opportunity is without some degree of risk, and generally the higher the return, the more involved the risk. If an opportunity is promoting little to no risk, or ‘guaranteed’ investment opportunities, this is a huge red flag.
- Returns which are too consistent: Due to the nature of investment, returns tend to go up and down over time, if an investment claims to generate consistent positive returns, regardless of the current market condition, then this is a concern.
- Unregistered investments and unlicensed sellers: These types of schemes tend not to register investments with state regulators or the SEC, and they use unlicensed individuals or unregistered firms to do the trading – this highly illegal, and also a clear concern that the investment is not being conducted above board.
- Issues with paperwork and payments: If you’re involved in an investment situation that has consistent accounting errors, funds not being invested as promised, or delays or difficulties in cashing out, then it may be an indication that the investment is part of a Ponzi scheme.