A High Yield Investment Program (HYIP), is normally offered via the Internet. HYIPs typically accept deposits anything from $10 to $1000 and promise high returns e.g. 2% everyday for 100 days.
Are They Legal?
Majority of HYIPs are illegal. They are "Ponzi Schemes" disguising under various real business terms like Forex, Futures, Bond, Hedge Fund, Currency Arbitrage, Nasdaq, Dow Jones etc. They usually have no license from the official authority to collect funds.
When asked, they usually pretend that their schemes are approved by governments in other countries or "pending for approval" by the local government (very soon) or subjected under different rules depending on the business terms they use to disguise their activities.
Hundreds of HYIP schemes
here and
here
Note: Not all HYIPs are illegal. However the vast majority of them are very suspicious. They are very smart in hiding their activities behind real business sectors. Many would invest a tiny amount of money in the real business just to "prove" that they are legitimate traders.
What is a Ponzi Scheme?
Ponzi scheme is a fraudulent investment operation that promises high return (profit) for the investors.
The truth is, the "profit" actually comes from:-
Money from newer investors
Your own money in the scheme (which they are sure will not be withdrawn by you anytime soon).
They never profited in investments in Forex/Futures/Hedge Fund/Bond or other fancy financial terms.
The reason they choose these terms is because they are difficult business sectors which will take an average persons many years to become an expert. Even expert investors (like Warren Buffet of Berkshire Hathaway or George Soros) sometimes lose money in several trades because of unexpected risks or volatile market sentiment.
However, HYIP offers a high percentage return regardless of the market condition. This is achievable because the money comes directly from the pockets of newer investors, not from "Forex Trading".
The difficulties in mastering these fields will make sure an average Joe will not delve deeper into the subject and will invest his money for the scheme owner to "manage".
If a reputable audit firm were to calculate the money invested by ALL investors and the profit, it is only enough to pay the first 40%-50% investors. The rest will need to pray for the following:-
No negative news in the press e.g. the owner of the scheme is caught by the police for illegal money laundering.
(Most schemes do not have permits to collect fund from the public)
No bad news means earlier investors will not withdraw ALL their funds. They may sometimes withdraw just the "Profit".
More people joining the scheme after hearing the "success stories" from earlier investors
When they could no longer trick newer investors into giving them money, the scheme collapses.
What is the major difference between a Ponzi and a Pyramid scheme?
Pyramid scheme requires you to find new "downlines" i.e. newer members to be placed under your account.
Ponzi does not require downlines. However, you are encouraged to tell your "success story" and attract new members and refer him/her to the owner of the scheme.
Pyramid scheme usually hide behind exotic products like "age defying vitamins", "foot toxin extractor", "wild honey with amazing curing power" etc.
Ponzi scheme hides behind "services" like Forex Trading or Hedge Fund where there is no physical products need to be delivered from manufacturers to the consumers.
HYIP scheme rarely last long. However, some newer HYIP with stronger "brand" last longer than usual.
Before the era of Internet, the spread of the HYIP is by word of mouth and by physical mail. All new investors are limited by physical boundaries (countries) where they usually pay a visit to the scheme owner to "verify its legitimacy". However for majority of the people, "legitimacy" simply means the owner is there smiling & shake hand with them in his office.
Nobody took the effort to verify with the authority of the legitimacy of the scheme. The "legitimacy" will be further enhanced if the scheme owner have a luxury car or wear expensive jewelry or watch.
Now however, the "success stories" can be propagated much faster, by email, websites, online forums and blogs. "Legitimacy" is calculated based on how professional the scheme's website looks and how many "success stories" found in the internet.
More answers to the following will follow soon:-
1.How to tell the difference between a genuine HYIP (based on real investment) and a fraudulent one?
2.Why some victims keep on investing on new HYIPs and lose money repeatedly?
3.Why are there so many "success stories" from many investors from various backgrounds?
4.What is the exit plan for the fraudulent scheme owner?
5.What are the various incarnations (variants) of HYIPs?
How newer fraudulent HYIPS pretending to be "honest" with its investors.
About The Author
Badrishah is an ex University Sains Malaysia (USM) student who spent 1 year studying franchise system & the success and fall of businesses. Although still young and inexperienced, he is willing to share his knowledge and is not afraid to learn from mistakes.
He is a member of Malaysian Franchise Association (MFA) online forum.
