A Ponzi scheme is an investment fraud in which money invested by individuals is used to pay out the earlier investors in the scheme. It is named after Charles Ponzi, who developed and perfected the scheme in the early 1920s. In a Ponzi scheme, the scheme operators will attract investors by promising them high rates of return, usually with little or no risk.
The operation typically involves raising money from new investors and using it to pay off earlier investors. In this way, the operators often seem to be making money and paying off investors, when in reality they are simply taking money from later investors to pay off earlier investors.
The truth is that the more people you have involved in the scam, the more money the organizers are able to make. Eventually, as more and more people invest money, there won’t be enough new money coming in to sustain the returns for everyone. To keep the scheme going, the number of new participants has to continually increase or the organizers have to find new pools of funds to tap into.
Ponzi schemes are illegal because they are essentially a form of theft. By convincing people to invest in what appears to be a legitimate investment opportunity and then diverting those funds to pay earlier investors, operators are essentially stealing from those who put their trust in them.
As such, participating in a Ponzi scheme could result in significant penalties including fines and even prison time for those responsible for organizing and operating the scheme.