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I've just come across what appears to be a deliberate parody ICO known as PonziCoin. It declares itself to be "The World's First Legitimate Ponzi Scheme", on the grounds that it is open and transparent about its intentions to funnel late investors' money into the hands of the founder and earlier investors. For some reason I can't fathom, at least some people appear to be investing real money in this.

I'm aware that actual Ponzi Schemes are against the law in most countries. The founder appears to be based in San Francisco so presumably US law applies here. The question is: is such a scheme against the law even if it never pretends to be anything else?

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  • Same question with pyramid scheme: law.stackexchange.com/questions/24639/…
    – DPenner1
    Jan 25 '18 at 15:12
  • Why would people invest in a deliberate ponzi scheme? Because they anticipate being one of the earlier waves of people who make insane money and are willing to hedge against the possibility that they might be left hanging the bag. It's just a risk like poker or anything else.
    – Paul Pena
    Mar 4 '19 at 1:53
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The ultimate question is whether an obviously joke enterprise constitutes a real offering of securities or just performance art (a Ponzi scheme is one of many types of securities fraud).

An unregistered offering of securities that does not fall within an exception is per se unlawful under federal law, but a security is generally defined as something offered with at least a prospect of making a potential profit for the investor which is not something that is true of this offering. (And if less than $1,000,000 are sold it might even be within an exemption to securities laws).

State securities laws are divided into two categories. Most allow any offering of securities so long as proper disclosures are made and the offer is restricted to the right kind of investors. A minority impose substantive quality standards on offerings and this offering might violate the law in those states (although this still would present the question of whether a known money losing opportunity is really a security since there is no evidence of an intent to potentially make a profit from the investment). I do not believe that California imposes substantive quality of investment standards on public or private offerings of securities.

Any deal whether or not it is a security is actionable if it is fraudulent. Normally an element of any claim for fraud is justified reliance upon a representation or upon a failure to disclose information. But, in this case, it is hard to see how anyone could say that they were justified in relying on any representation in making a purchase because they were told that they were being cheated. So, it is hard to see how a fraud claim would be sustained here either.

I'm not sure that this cleanly falls into the category of gambling either, even though there is money at stake and the outcome isn't entirely certain. This doesn't really seem like a game of chance to me.

Indeed, viewed as performance art, this scheme might even be entitled to First Amendment protection.

Ultimately, I would not prioritize a civil or criminal action against this enterprise either from the perspective of a private lawyer representing an investor, or from the perspective of a government enforcement authority. And, while I would be a little nervous about running this enterprise, I wouldn't be quaking in my boots. In a civil lawsuit, any award would probably be minimal, and in a criminal case there would probably be an extremely generous plea offered.

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The site is worded as a parody, so it's likely this isn't a thing. Further, there is now a disclaimer on the site that says

This has gotten crazy out of hand, I apologize but we will no longer be selling PonziCoin on this site because this was a joke. I cannot terminate the contract but I will not be selling any coins that I own.

In the Q&A section, under "This seems like a great investment opportunity!," the reply is:

A: No, this is a joke. Don't put any significant amount of money in this, follow /r/personalfinance's advice and please don't invest more than you can lose in crypto

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Probably. While it doesn't sound like there's any fraud, it does seem to be gambling. In most jurisdictions, unregulated online gambling is illegal.

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  • How is this gambling (in a manner more criminal than say, buying a non-dividend-paying stock and hoping the price goes up/the company is bought out)?
    – sharur
    Jan 25 '18 at 16:54
  • @sharur I think buying stock involves skill and intelligent choice, where gambling applies to games of chance. Of course, that doesn't seem to explain poker or other games where skill is involved.
    – mark b
    Jan 25 '18 at 23:21
  • @sharur The key difference is that stocks and other securities issued to the public are subject to regulatory requirements that ensure transparency and fairness. Gambling is just a game of luck -- in this case, played with loaded dice. Jan 26 '18 at 1:05
  • This isn't gambling. Laws for that are very carefully defined and, in the United States, explicitly exclude what can be termed "bona fide business arrangements" (for lack of memory of the correct phrase) such as investment and securities.
    – Nij
    Jan 26 '18 at 3:15
  • @Nij Except they're not bona fide business arrangements because they don't meet the SEC requirements to be a security offered to the public. If they did, you would also be purchasing unregistered securities, which is also illegal. Jan 26 '18 at 7:13
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My understanding was that Ponzi schemes are illegal. Yes, that was a full stop. However, it is generally not illegal to give somebody money if you want.

The only way that I can fathom this is if that by declaring the operation fully and transparently, including the intention to funnel money as you have stated, that it is no longer what is declared a Ponzi scheme since there is no slight of hand and no deception.

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  • You still have an insolvent organization making preferential transfers and their "investors" knowingly requesting them. Jan 26 '18 at 7:15
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    It is vanishingly unlikely that the law says "Ponzi schemes are illegal". The law instead will carefully define the thing that is illegal (perhaps using the phrase "Ponzi scheme" as a name). The question is whether this thing fits that definition, not what it is called. Mar 4 '19 at 13:34

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