Which statement best describes a Ponzi scheme?

• A. It uses new investors' money to make payments to earlier investors.
• B. It involves a legitimate business with high profits.
• C. It is a form of tax evasion.
• D. It is a counterfeit product scheme.

Answer: (A)

Ponzi schemes rely on inflows from new participants to pay returns to earlier investors, not on any real profits from a business. The money from newer investors is the source of the payments to the earlier ones, creating the appearance of high returns. As long as new money keeps coming in, the scheme can continue, but it collapses when recruitment slows or funds run out, leaving most participants with losses. This is different from a legitimate business that actually earns profits, and it’s not about evading taxes or selling counterfeit products.