identity a Ponzi or Pyramid

Sergey Mavrodi’s Bitcoin-based MMM Global Republic of Bitcoin scheme collapsed this week, affecting the South African branch of MMM Global.

According to a report by Fin24, MMM Global South Africa is one of nine companies being investigated by the SAPS Specialised Commercial Crimes Unit for being an alleged Ponzi scheme.

“The South African “community” has been growing in numbers over the years, as South Africans seek ways to escape debt and poverty. It has even been described as a stokvel by some,” stated the report about MMM Global South Africa.

The local “investment” platform encouraged members to donate money to others by rewarding them with a bitcoin-linked virtual currency. “Investors” then received a claimed 30% return.

A Ponzi scheme occurs when a claimed return is 20% higher than the repo rate, which in SA is 7%, said Fin24.

How to identity a Ponzi or Pyramid scheme

While Ponzi and pyramid schemes are both classified as money scams, there are subtle differences.

In a Ponzi scheme and a pyramid scheme, existing investors are compensated by the contributions of new investors.

Ponzi scheme participants earn returns from their investment, while pyramid scheme participants earn money by recruiting new participants.

Below are 10 Ponzi and pyramid scheme indicators you need to watch out for, based on reports by the US Securities and Exchange Commission; CNBC; and theFinancial Intermediaries Association of Southern Africa (as reported by Fin24).
  1. Promises of high returns in a short time period. High and fast returns may suggest that commissions are being paid out of money from new recruits.
  2. Easy money or passive income. Be wary if you are offered compensation in exchange for little work, such as recruiting others and placing advertisements.
  3. Buy-in required. Be careful if you are required to pay a buy-in to participate in the programme.
  4. Complex commission structure. Be concerned unless commissions are based on products or services that you or your recruits sell to people outside the programme.
  5. Emphasis on recruiting. If a programme focusses on recruiting others to join the programme for a fee, it is likely a pyramid scheme.
  6. Don’t be fooled by the claims it’s not a pyramid scheme because you don’t have to spend a lot of money up front.
  7. Be careful if you have to qualify for certain levels of bonuses, which require various levels of product purchases and other associated costs.
  8. Vague business models. Steer clear of investment schemes that are based on vague investment models, or models which do not make sense.
  9. More participants. Avoid investment schemes that rely on you bringing in more participants in order to generate a return. This is a classic trait of both Pyramid and Ponzi schemes.
  10. Too good to be true. If it is too good to be true, it usually is.