The word Ponzi is now synonymous with fraud, especially financial fraud. Its important investors do very basic scoring of financial offers they receive or are considering.
What is a Ponzi Scheme? A Ponzi scheme is a fraudulent investment scheme that offers high interest but pays this interest by taking the deposits of new investors to pay the earlier investors. A Ponzi scheme is a game of numbers for the perpetrators; if there are more new investors, the scheme continues. A Ponzi scheme is very similar to a pyramid scheme; a pyramid scheme involves recruiting new “investors”. A Ponzi scheme is always illegal, and it consists of selling a product or service.
How can you spot a Ponzi scheme? It is complex; Ponzi schemes being fraudulent, always seek to mimic what is legal to confuse and deceive investors. Take Charles Ponzi, from whom the name Ponzi Scheme comes. Charles had a rather formal name for his scheme; he called it the Securities and Exchange Company or SEC. s. So let’s talk about two critical red flags that you should look out for.
- Incomplete registration
- Custodian
- Outlandish promises of investment return
Incomplete Registration
If the company Registration is incomplete or absent, it’s a red flag. All organisations that do business with the public have to hold a valid and up to date registration. This requirement is essential for any company offering financial products or services. Simply having Corporate Affairs Commission registration (CAC) registration is insufficient. I will list the two financial activities and the regulatory body empowered to register or license them to simplify this.
The company seeks to accept deposits and make loans: Central Bank of Nigeria (CBN)
The company seeks to offer or solicit investment products to the public: Securities and Exchange Commission (SEC).
If a company offers public investment products, that organisation MUST be SEC registered. Keep in mind that a company cannot also seek to raise funds from the public to fund its private business. The investor must ask two questions from any entity offering investment products.
- Is the entity providing the investment service duly registered by SEC?
- Is the investment scheme authorised by the SEC?
- Who is the fund custodian?
For example, please look at this prospectus by the Chapel Hill Denham on their Bond fund in figure 1; they disclose that their bond fund is authorised and registered in Nigeria by SEC.
