Investment fraud includes a few different kinds of acts including:
- Market manipulation
- Pyramid schemes
- Ponzi schemes
- Advance fee fraud
In real estate, you may run into a pyramid scheme, for example. With one of these schemes, you may be offered an opportunity to invest into a franchise or business. Then, you may be asked to bring in more investors to help increase your own profits or to get your investment back.
This is not legal if the legitimacy of the franchise can’t be verified. For example, if this is a chain scheme and the profits you make aren’t earned by selling the original product or products you’re given but instead from recruiting, then you should be wary.
Selling franchises rather than the product means that there will reach a time when there are no more potential investors to support the pyramid. At that point, no new funds are transferring from the bottom up, and the entire pyramid collapses.
Who makes money from pyramid schemes?
While those at the top of the pyramid tend to get back their investments, those lower on the pyramid do not.
For example, imagine investing into a unique franchise. That franchise may or may not actually exist, but the person who asks you to invest says that you can get the money back that you’ve invested if you bring more investors to them and those people also invest. If you’re good at marketing, you may bring many people to invest in the franchise, but when it turns out that the original franchise doesn’t exist or fails, anyone who is invested tends to lose.
Some people will walk away from the pyramid scheme with money. Namely, the original person who started the scheme and those who earned money and decided to walk away early. The people at the bottom of the pyramid, latecomers, tend to pay into a system as it is on the verge of collapse. At that point, they lose everything to those who reaped the benefits of their investments.
To avoid pyramid schemes, always do your research. Make sure an investment is into real property or a real business. If you’ll receive royalties for bringing on new investors or have no real information about the franchise to go over, it’s better to walk away.