HYIP & Ponzi Schemes Explained
Why Be Aware
When investing your hard earned cash there are several considerations to be made. As a basic rule of thumb, if anything claims to have a high return it is high risk and if it sounds to good to be true, IT IS.
I also favour & often quote “never make an assumption”
Many people confuse the terms used, such as HYIP, Ponzi & Pyramid scheme’s, thus incorrectly assume that a particular program or opportunity is to be labelled as one of these schemes.
The term ‘Pyramid Scheme’ is often incorrectly used, it is more correctly to be used when making a referral to HYIP and/or Ponzi.
Although some businesses appear to fit into one of the above categories that assumption may not be the case.
The confusion is largely escalated by the mis-interpretation of their associated meanings, so firstly I will quote text explaining the correct interpretations of these schemes.
What is a HYIP & Ponzi scheme?
A high-yield investment program (HYIP) is a type of Ponzi scheme, an investment scam that promises unsustainably high return on investment by paying previous investors with the money invested by new investors. Most of these scams work from anonymous offshore bases which make them hard to track down.
Operators generally set up a website offering an “investment program” which promises very high returns, such as 1% per day (3778% APY when returns are compounded every day), disclosing little or no detail about the underlying management, location, or other aspects of how money is to be invested. The U.S. Securities and Exchange Commission (SEC) has said that “these fraudulent schemes involve the purported issuance, trading, or use of so-called ‘prime’ bank, ‘prime’ European bank or ‘prime’ world bank financial instruments, or other ‘high yield investment programs.’ (HYIP’s) The fraud artists … seek to mislead investors by suggesting that well regarded and financially sound institutions participate in these bogus programs.
A Ponzi scheme is a fraudulent investment operation where the operator, an individual or organization, pays returns to its investors from new capital paid to the operators by new investors, rather than from profit earned through legitimate sources. Operators of Ponzi schemes usually entice new investors by offering higher returns than other investments, in the form of short-term returns that are either abnormally high or unusually consistent.
Ponzi schemes occasionally begin as legitimate businesses, until the business fails to achieve the returns expected. The business becomes a Ponzi scheme if it then continues under fraudulent terms. Whatever the initial situation, the perpetuation of the high returns requires an ever-increasing flow of money from new investors to sustain the scheme.
Typically, extraordinary returns are promised on the original investment and vague verbal constructions such as “hedge futures trading”, “high-yield investment programs”, or “offshore investment” might be used. The promoter sells shares to investors by taking advantage of a lack of investor knowledge or competence, or using claims of a proprietary investment strategy which must be kept secret to ensure a competitive edge.
Ponzi schemes sometimes commence operations as legitimate investment vehicles, such as hedge funds. For example, a hedge fund can degenerate into a Ponzi scheme if it unexpectedly loses money (or simply fails to legitimately earn the returns promised and/or thought to be expected) and if the promoters, instead of admitting their failure to meet expectations, fabricate false returns and (if necessary) produce fraudulent audit reports.
Accreditation & Links
This information incorporates extracts from ‘WIKEPEDIA‘.