How do Ponzi Schemes differ from pyramid schemes?

Sometimes an investment seems too good to be true. While some investments are legitimate and legal, others such as Ponzi schemes and pyramid schemes are considered white collar crimes in Ohio and elsewhere. However, while there are some similarities, Ponzi schemes are not the same as pyramid schemes.

A Ponzi scheme exists when a person invests money into the scheme via a “portfolio manager” in exchange for a promise of high return. When the investors want their investment back, these funds are taken out of investments contributed to the scheme by later individuals investing into the plan. The organizer of the plan simply transfers the funds received from one investor to another, without making any real investments.

In comparison, pyramid schemes take place when the initial schemer recruits other people to invest into the scheme and those people then recruit other people to invest in the scheme, etc. Some pyramid schemes incentivize recruitment by portraying it as an investment opportunity, such as providing people with the permission to sell a specific product. However, in pyramid schemes the person investing into the scheme shares the proceeds of their sales or investment with those higher up in the scheme.

In the end, in Ponzi schemes, a person gives an investment to a “portfolio manager” and then when the investor wants a return on their investment, they are paid via funds contributed to the scheme by other investors. But, in pyramid schemes there is a chain of recruitment wherein the investors pay their recruiters for the right to participate in the scheme or sell a specific product.

However, both in Ponzi schemes and pyramid schemes, only the person who founded the corrupt scheme can be criminally charged; the participants in the scheme will not face criminal liability if they did not know the scheme was illegal and were not purposely involved in its inception or continuance. Because of the complexities associated with both Ponzi schemes and pyramid schemes, those accused of such crimes will want to ensure they seek the help necessary to understand what they are up against, so they can formulate a strong defense.