HYIP stands for High Yield Investment Program and is a way for people to invest money into high yield, high risk markets who couldn't normally do so on their own, usually because they lack the initial investment funds. A HYIP pools money from investors together and uses the funds to invest in these markets; investors receive a portion of the return on their investments over a pre-designated amount of time. Most HYIPs pay interest daily, weekly, or monthly over the Internet. While some HYIPs are valid investment tools, a majority are actually one form of a ponzi scheme.
Fraudulent HYIPs
A ponzi scheme is a fraudulent investment strategy that promises investors high returns with little or no risk. The scheme works by using money from new investors to pay existing investors; the criminal is always looking for new people to join in order to keep the cycle going. Investors are unaware that the money is not actually being invested; instead, it is being used for the criminal's personal use and to pay investors just enough to avoid being caught. Eventually the money runs out and the scheme is discovered. A HYIP can easily be a ponzi scheme because investors have no guarantee the funds are truly being invested.
Fraudulent HYIPs often have common similarities: many make false claims of secret banking systems and alternative financial networks, and most have websites that use financial jargon incorrectly and include fake testimonials, among other things, to convince investors that they are a valid company. In many fraudulent cases, not only are investors never paid any interest yield, they also never see their original investment again. False HYIPs became common enough that the Federal Bureau of Investigation (FBI) issued warnings about being taken in by the claims made in these fraudulent programs.
Examples of False HYIPs
Perhaps the most-heard-of HYIP scam is OSGold, a company founded by David Reed in 2001 that reportedly stole more than $250 million US Dollars (USD) from investors. Another large-scale scam is known as the PIPS scam, or People in Profit System. Started in 2004 by Bryan and Sharon Marsden, this false HYIP required investors to pay a $450 USD initial investment over an interest period of 180 days, for which they were promised a return of 2% per day.
Tips for Investing in HYIPs
When considering making an investment in a HYIP, it is best to do diligent research first. Any legitimate security that is sold to the public must be registered with the Security and Exchange Commission (SEC). If it is a trustworthy investment program, it will be searchable through the SEC.
Other things to consider include: whether the claims sounds to good to be true, and how the people running the program generate the high yield returns that are being promised. If the proponents of the HYIP cannot or will not explain how the returns are made, it may be best to avoid investing in the program.