Difference between Pyramid Schemes and Ponzi Schemes
Basis |
Pyramid Schemes |
Ponzi Schemes |
---|---|---|
Primary Mechanism |
Recruitment of latest members to offer returns. | Payment of returns to in advance traders the use of finances from new investors. |
Structure |
Participants shape a hierarchical pyramid. | Operates as a single operator at the top, deceiving traders about income. |
Source of Returns |
Returns come from the contributions of the latest recruits. | Returns paid to in-advance buyers are derived from funds raised from subsequent buyers. |
Sustainability |
Collapses whilst recruitment slows; unsustainable. | Ultimately collapses as the operator cannot entice sufficient new investments to cover returns. |
Legal Status |
Illegal in many jurisdictions. | Illegal because of its fraudulent nature. |
Promises to Investors |
Promise of excessive returns through recruitment efforts. | Promise of excessive returns via funding with the operator. |
Founder’s Role |
Founders may also recruit early participants however no longer crucial for ongoing operations. | Founder actively solicits and manages funds, growing a facade of legitimate business operations. |
Deception Mechanism |
Emphasizes recruitment, disguising the shortage of a true business. | Promises steady, high returns to buyers, misleading them about the character of the funding. |
Duration of Operation |
Can perform for a variable length earlier than collapsing. | Operates until the scheme can’t entice enough new traders to satisfy obligations. |
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