Charges of investment or securities fraud can be prosecuted under Texas or federal law. In either case, a conviction can result in serious penalties, including a prison sentence, large fines and restitution. Two of the more common types of investment fraud are Ponzi schemes and pyramid schemes. They are similar in nature, yet there are important differences.
A Ponzi scheme involves fraudulent investment services. The promoter of a Ponzi scheme promises investors their funds will be invested in business ventures or the stock market. However, there is little or no real investment activity, and when investors seek to cash out all or part of their investments they are paid from the funds paid in by subsequent investors. A Ponzi scheme can continue only as long as funds from new investors are available to pay off earlier investors.
In a pyramid scheme, the prospective investors typically pay for the right to sell a product. The investors are then encouraged to recruit additional investors, who in turn pay the investor who recruited them for the right to sell the product. In a true pyramid scheme, what is really being sold is the right to sell the product, and investors only make money by recruiting additional investors. Like a Ponzi scheme, a pyramid scheme requires a continuous inflow of money from new investors to sustain itself. When the scheme becomes too large and new investors cannot be recruited fast enough, the pyramid collapses and the more recent investors lose their money.
Defenses are available to charges of investment fraud. In some cases the defendant can successfully show the business venture was legitimate. Some businesses which appear to be pyramid schemes are in fact legitimate multi-level marketing ventures. A defendant who was recruited as an investor and then recruited others can also argue they were unaware of the fraud and lacked criminal intent.
Source: Investopedia.com, "What is the difference between a Ponzi and a pyramid scheme?," Arthur Pinkasovitch, accessed March 14, 2015