What is a Ponzi Scheme?

If you’re considering or are already operating a home business venture, you’ve probably asked this question or had someone ask it of you: Is this one of those pyramid scams or Ponzi schemes?

If someone has to ask this, then they actually don’t know what a Ponzi scheme (commonly called a pyramid) actually is. Because if they did know what it is, there are some certain questions to ask (either themselves or the person trying to “sell them”) that would answer this question definitively.

So, what IS a Ponzi Scheme?

A pretty clear definition provided at FirstClassMLM.com is:

A Ponzi scheme is an illegal investment scheme that involves paying returns to investors out of the money paid in by later investors, rather than from net revenues generated by any real business. According to the FTC (Federal Trade Commission), “…there is an expression that nicely summarizes this scheme: It’s called “stealing from Peter to pay Paul.”

(By they way, FirstClassMLM is a great site to help you answer all kinds of questions about the industry.)

What questions can you ask to make sure what you’re doing is legal?

Based on that definition, then, what questions can you ask yourself or Mr. Salesman to help you know whether or not what you’re looking at is a legal venture?

  1. What am I paying for? Am I getting anything in return for my money? Is there a real product or service of equal or greater value that I receive in exchange for my money? If so, would I consider it a fair exchange should I never, EVER, receive any other compensation or product or service from this moment on?
  2. If I am doing this so that I receive future compensation (any return on the investment whatsoever) in exchange for my money, then where does that money come from? When I do the math, is there enough money coming into this “system” to pay me and everyone else who expects the same? If it’s not an investment, per se, then how are funds being generated to re-compensate me for my money?
  3. Those two question threads would help you determine if what you’re doing is legal in the eyes of the FTC, but I propose one last question to determine if it’s ethical: the first 2 questions being satisfied, if there are any funds left as “profit” from my (and everyone else’s) purchase or investment, then where does that money go? Who gets it and what are they using it for? After all, you don’t want to be funding a terrorist group. Helping the homeless or feeding the hungry would be nice, but even if it’s pure profit for a private individual or group, you just want to be sure you’re not funding anything that would cause harm to others.

If you’re not getting anything “up-front” in exchange for your money (in other words, the money you “pay” isn’t for a “purchase” of goods or services), other than an expected future compensation, then you might want to say “no” to this endeavor because the FTC might call it a Ponzi, shut it down and prosecute everyone involved.

That actually depends on whether or not this is an investment program, in which your money is being invested so that it would earn dividends or interest. In this case, you aren’t “purchasing” anything, but investing your money with an expectation of growth, knowing full well that (markets being what they are) you might loose your money instead. Most of us call that gambling, but the FTC calls it trading stocks and bonds. ;)

In the end, only you can determine if what you’re doing feels good in your gut. Don’t let claims of big money turn your head. Always be aware that it’s quite possible that you’ll never get your money back. So you need to know that if that should happen, you’re happy with what you’re getting in return for your money. AND you’re satisfied that anyone else participating in it would feel the same.

What to do if you discover it’s not legal?

If you ponder and ponder and ponder and are finally able to put your finger on what bugs you about something, then don’t keep it to yourself. Talk to the person who’s trying to convince you to follow them. It’s been my experience that sometimes people just overlook something. They are human after all, and appreciate another perspective on the matter.

Ponzi King, Bernie Madoff

Ponzi King, Bernie Madoff

How did Bernie Madoff get away with it for so long?

Ok, so Bernie was the “investment king” for a while. People were confident that he knew what he was doing and could help them. Unfortunately, he was a big fat liar. While everyone understood that he was investing their money for them, in socks, bonds, and business investments so that they’d earn dividends and interest, he was really keeping the money for himself. Every once in a while he’d take some money from new “investors” to give to the older investors as if that was their profits from the investments. Stealing from Peter to pay Paul – quite literally.

Is Network Marketing a Ponzi?

While some network marketing programs have been shut down because they were ruled by the authorities to be a Ponzi or pyramid scam, most are not. That’s because they are backed by companies that offer real products and/or services to real people who really want them. Therefore, the two questions to consider per the FTC’s definition are perfectly satisfied. The best test being that there are some “customers” who are perfectly happy with the products/services they received in exchange for the money paid.

If you’re looking for a legal company to get work with to either supplement or replace your income, visit http://freedom.danniellewood.com and either fill out the form on that page or contact me via either of the methods at the bottom of the page. I’ll help you get the info you need, 3-way you to our team, and answer your questions, so you can gauge our integrity, and decide if you want to work with us to change your life. Beginning right now.

2 Responses to What is a Ponzi Scheme?

  1. WOW! Len Clements and I have been on the same wavelength: http://www.insidenm.com/videos/whats-an-illegal-security-v1-n4/

  2. Pingback: Evaluating a Home Business - What Am I Paying For? | Danni's Blog

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