There is an old saying that if something seems too good to be true, it probably is. And this is also applies when looking to invest money.

There are a range of investment options to look into – and some may promise to offer great returns with zero risk.

To avoid getting involved in a fraudulent investment scheme, it is important to look out for spurious claims such as these.

Here we look at two of the most infamous investment scams – the Ponzi scheme and the pyramid scheme.

Ponzi scheme

A Ponzi scheme is a type of investment fraud that often promises to invest money and generate high returns with little or zero risk to depositors or investors.

Ponzi schemes generally have no real investment, or the business doesn’t actually exist or does not work in the way described.

In a Ponzi scheme, the “portfolio manager” – the person running the scam – collects money from new depositors/investors to pay off earlier depositors/investors, and typically collapses when no new depositors/investors are found.

The Ponzi scheme is named after Charles Ponzi, an Italian businessman operating in the US and Canada who made this type of scam famous in 1920.

As every investment offers some degree of risk, with Ponzi schemes the warning signs include:

• The promise of fast and high returns;

• Assurances of low risk or zero risk, in stark contrast to investment theory, which defines “higher risk, higher return”;

• A project that is not properly registered or does not have a licence from an authorised authority;

• Missing paperwork or reports.

• Complicated investment strategies – if you can’t understand how your money will generate returns, it is probably too good to be true.

Pyramid scheme

A pyramid scheme is a business model that recruits members via a promise of payments for enrolling others into the scheme, rather than selling real products or services.

And even if there are products, the quality is usually poor and they are difficult to sell.

To become a member of such a scheme, investors are compelled to pay a fixed amount in exchange for “huge profits” made solely by recruiting other participants.

This scheme allows early investors to get their money back or even make some profit, which leads them to recommend it to others, with new investors at the bottom of the pyramid losing out completely.

Pyramid schemes are so named because their compensation or commission structures resemble a pyramid.

Alarm bells that an investment may likely be a pyramid scheme include:

• A primary emphasis on recruiting new participants, and no actual products or services to provide, or they are difficult to sell or of poor quality if they actually do exist;

• Promises of high returns in a short period of time;

• Assurances of easy money or passive income without doing anything other than finding new members;

• As with Ponzi schemes, a lack of clear documentation, especially financial statements from an independent auditor;

• It is complicated to discover the profit that each member will receive or how the project generates revenue, pointing to it being unlikely that such a project actually has any real profits to distribute to members.

How to protect against such schemes

To protect against illegal and fraudulent schemes, investors should study the scheme thoroughly to understand more before deciding to invest.

• Be wary of any investment project that says it guarantees high returns in a short period of time.

• Ask for detailed information about the company, such as business or investment plans.

• Check whether the company has a licence from the relevant authorities.

• In Cambodia, check it has a licence or approval from the Securities and Exchange Regulator of Cambodia (SERC) to raise funds from the public.

• Increase knowledge through participating in workshops or training courses.

Raising funds directly from the public to invest in a specific investment project and distribute the profits to investors is known as a Collective Investment Scheme, which is a type of securities to be launched in Cambodia in 2023.

In this case, the fund manager is required to have a licence from the SERC.

Reference: www.investopedia.com.

Prepared by: Securities and Exchange Regulator of Cambodia, Legal Affairs Department;

Email: [email protected]; Phone: 023 885611.