Pyramid Scheme vs Ponzi Scheme
Were you too attracted to a company that promise unusually high rates of return on investment in its schemes? You are not alone as it is human nature to feel enticed to schemes with offers that are too good to be true. Two names Pyramid schemes and Ponzi schemes are used to describe these fraudulent schemes that lure unsuspecting people into investing their money, and pays them through payments made by later members. There are many similarities between Ponzi and Pyramid schemes, though there are also differences that will be highlighted in this article, to make readers alert to such programs and schemes.
Ponzi Scheme
Ponzi schemes are so called because of Charles Ponzi, who was an ordinary clerk and initiated first such a scheme that became known all across the country. In such schemes, potential investors are promised extremely high rates of return on their investments with little or no risk involved. Nothing is produced or sold, and old members are paid with the money obtained from new members. As long as the scheme keeps adding new members and keeps getting money, older members are paid high returns on their money making more and more people believe in the scheme. Ponzi schemes collapse on their own, when the speed with which money from new members is required does not add into the scheme, and older members shout for their money.
Pyramid Scheme
There are many schemes having many similarities with Ponzi schemes but differ on some points. Pyramid schemes are such schemes that appear legitimate businesses, but are pointed out by FBI as schemes that are fraudulent and ask common people to stay away from those schemes. A pyramid scheme is so called because of every subsequent level being larger than the previous one. So the founder sits at the top while new members are added to lower level. The money that comes from new members goes up the order. There is no sale of product or service, just like Ponzi schemes, and members at higher levels enjoy the fruits of labor of members in their down line as they remain involved in recruiting new members.
What is the difference between Pyramid Scheme and Ponzi Scheme?
Both Ponzi and Pyramid schemes do not make any profits by selling a thing or a service, but fund older members with money from new members. The most basic difference between a pyramid scheme and a Ponzi scheme is that, in a pyramid, members need to make new members in the down line to receive profits, and as long as new members get recruited, the fraud gets perpetrated. It is when new members (read victims) do not join does the pyramid collapse.
In Ponzi schemes, there is no such requirement for members to recruit new members, and they fall in line because of the lure of higher rates of return. Ponzi does not collapse suddenly like a Pyramid, and older investors are lured to keep their money locked for a lengthy period by offering them higher returns. In Ponzi, founder interacts with the entire family while in Pyramid; new members have no interaction with the founder. Though the source of payment in both schemes is new members, in Pyramid, this source is always disclosed while, in Ponzi, the source of payment is never disclosed.