A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organizers often promise to invest your money and generate high returns with little or no risk.

But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use it to pay those who invested earlier and usually keep or skim some for themselves—often to fund an extravagant personal lifestyle.

With little or no legitimate earnings, Ponzi schemes require a constant flow of new money to survive. When it becomes hard to recruit new investors, or when large numbers of existing investors cash out or demand their money back, these schemes tend to collapse.

Ponzi schemes are named after Charles Ponzi, who duped investors in the 1920s with a postage stamp speculation scheme.

Ponzi Scheme Red Flags

Many Ponzi schemes share common characteristics. Look for these warning signs:

• High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any guaranteed investment opportunity.

• Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.

• Unregistered investments. Ponzi schemes typically involve investments that are not registered with the Securities and Exchange Commission (SEC) or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.

• Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.

• Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.

• Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.

• Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.

In Florida, Ponzi schemes are considered a form of investment fraud and are illegal under both state and federal law. These schemes violate the Florida Securities and Investor Protection Act (Chapter 517, Florida Statutes), which prohibits fraudulent practices in relation to securities transactions. Additionally, Ponzi schemes are subject to federal securities laws and are enforced by the Securities and Exchange Commission (SEC). The SEC requires investments to be registered and investment professionals to be licensed, providing transparency and protection for investors. When individuals or entities operate a Ponzi scheme in Florida, they may face criminal charges including fraud, theft, and violations of securities regulations, which can result in imprisonment, fines, and restitution orders. Victims of Ponzi schemes in Florida may also have civil remedies available to them, including the possibility of filing a lawsuit to recover their losses. It is important for investors to be aware of the red flags associated with Ponzi schemes, such as promises of high returns with little risk, consistent returns regardless of market conditions, unregistered investments, unlicensed sellers, secretive strategies, paperwork discrepancies, and difficulties in receiving payments.