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 Indiana, Ponzi schemes are considered a form of securities fraud and are illegal under both state and federal law. The Indiana Securities Division, part of the Office of the Indiana Secretary of State, enforces securities laws designed to protect investors from such fraudulent activities. These laws require investments to be registered, and investment professionals to be licensed. The Division can investigate and prosecute individuals and entities involved in Ponzi schemes. At the federal level, the Securities and Exchange Commission (SEC) also investigates and takes action against Ponzi schemes, as they violate multiple federal securities laws. Victims of Ponzi schemes in Indiana can report the fraud to the Indiana Securities Division or the SEC and may also have the option to pursue private legal action against the perpetrators. It is advisable for individuals to consult with an attorney experienced in securities law if they suspect they have been involved in a Ponzi scheme or if they are facing allegations of operating one.