A Ponzi scheme is a fraud that leaves people with both financially and emotional scars. Prevention of Ponzi schemes is largely based on the nature and types these large-scale scams. Ponzi schemes cab be prevented through a comprehension of red flags by following five key steps.
Whenever a person comes across an investment opportunity, there are five key steps that one should follow. First is determining whether the seller is licensed. An unlicensed seller most likely means that the investment opportunity is a scam. Second is to identify is the investment is registered. The Securities and Exchange Commission articulates that Ponzi schemes typically feature unregistered investments (Lewis, 2015). The third step is to compare the risks with the potential rewards. An investment that promises to bring a relatively high reward within a short duration is most likely a Ponzi scheme. The next step is to understand the investment. The golden rule here is that a person should not put money in an investment that they do not fully understand ( Bosley & Knorr, 2018) . By following these steps, individuals will go a long way in preventing Ponzi schemes.
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Aside from these steps, one should also understand the red flags. The first is a high investment with minimal or no risk is likely to be a Ponzi scheme. Secondly, Ponzi schemes largely feature unregistered investments. Along this line, the schemes typically feature unlicensed sellers. These are sellers who are not registered with any professional body. The fifth red flag is secretive or otherwise complex strategies. These are strategies that a person finds to grasp and one cannot determine how his/her funds are being used. Another red flag arises from issues with paperwork. Since Ponzi schemes typically feature unregistered investments, the investor will unlikely be issued with any certificate or receipt to determine ownership of that investment. The final red sign is difficulty in receiving payments. The lack of investment means the investor will not receive payments.
References
Bosley, S., & Knorr, M. (2018). Pyramids, Ponzis and fraud prevention: lessons from a case study. Journal of Financial Crime .
Lewis, M. K. (2015). Understanding Ponzi Schemes: Can Better Financial Regulation Prevent Investors from Being Defrauded? . Edward Elgar Publishing.
