Ponzi scheme, also known as pyramid scheme, is a type of investment fraud that works essentially by bringing in new investors to pay off old ones. In its pure form, there’s never any actual business activity; instead, the money just rolls backward from ever-increasing numbers of investors to keep up the appearance of profits.
It’s typical in this investment scam that potential investors are wooed with promises of extraordinarily large returns attributed to the investment manager’s savvy, skill, or some other secret sauce.
The Ponzi scheme provides investors with investment returns that are distributed, at least for a time, out of new investors’ investment principal, instead of from profits. Investors will continuously receive the return as long as new investors keep coming with new funds and old investors don’t redeem too large sum of their investment at once.
Because of the shape of any chart that reflects their basic premise, Ponzi schemes are also called as pyramid schemes. They are built on ever-growing layers of new recruits are needed to provide gains to the smaller, earlier cohorts.