Ponzi schemes and pyramid schemes are different, but they revolve around similar concepts. In both of these schemes, investors convince other individuals to give them money in return for unrealistic returns on investment.
The main characteristics pyramid and Ponzi schemes have in common is that they both require constant cash to maintain sustainability. But the differences arise in the structure of these schemes and the types of products offered to the people who get involved.
The U.S. Securities and Exchange Commission states that Ponzi schemes typically have the same characteristics. These include promising high returns to those who participate with very little to no risk. The returns are also consistent – they tend to increase and increase with no regression.
The process usually involves funding contributions to a “portfolio manager” who promises returns. When investors request their funds back, they receive money from investors who recently added to the funding pool. Essentially, the portfolio manager continues to move funding from one person to another without actually investing the money.
Pyramid schemes involve one initial person who brings on investor after an investor. These people are also allowed to recruit their own investors to join their network, and this process can continue indefinitely.
In many pyramid schemes, the initial person presents an investment opportunity, usually in the form of a product that the investor can then sell. Every new investor who joins the scheme then receives the chance to sell it to others, perpetuating the scheme as the product or investment grows in popularity.