What is a Ponzi scheme?
A Ponzi scheme is an investment fraud that pays supposed returns to earlier investors using money collected from newer investors, rather than from any actual profit an underlying business has earned, according to 
Investor.gov. The arrangement depends entirely on a continuing flow of new money coming in, and it collapses once that flow slows down or too many investors try to cash out at the same time, per the same SEC description. The scheme is named for Charles Ponzi, but the same structure appears today in phony hedge funds, real estate deals, and cryptocurrency investment programs marketed to the public. The U.S. Securities and Exchange Commission treats Ponzi schemes as one of the core categories of fraudulent or unregistered securities offerings it investigates and prosecutes, alongside pyramid schemes and high-yield investment programs, as described in its 
guidance on reporting suspected securities fraud.
How the fraud actually works
The operator of a Ponzi scheme tells investors their money is being placed into some legitimate-sounding strategy, then simply uses incoming cash from new participants to make payments to earlier participants, creating the appearance of steady, reliable returns without ever generating real investment income, as Investor.gov explains. Because there is no genuine underlying revenue, the operation only survives as long as new money keeps coming in faster than existing investors withdraw it. Once recruitment slows, a large number of investors ask for redemptions at once, or the operator simply stops paying, the scheme runs out of cash and unravels, per the SEC's description of Ponzi schemes. This is closely related to, but distinct from, a pyramid scheme, which pays participants primarily for recruiting other participants rather than for any product or service sold, and which also has no way to sustain itself once recruitment slows, according to Investor.gov's page on pyramid schemes.
Warning signs the SEC flags
Investor.gov lists a specific set of red flags common to Ponzi schemes: high returns with little or no risk, guaranteed or unusually consistent returns regardless of market conditions, investments that were never registered with the SEC or a state regulator, sellers who are not licensed, secretive or overly complex strategies nobody can clearly explain, unexplained account-statement errors, and difficulty getting payments or cashing out at all, per the SEC's Ponzi scheme page. Broader investment-fraud red flags identified separately by the SEC include pressure to act immediately, fear-of-missing-out pitches, fake testimonials or credentials, and requests to pay by gift card, wire transfer overseas, peer-to-peer payment app, or crypto asset, according to Investor.gov's guide to avoiding investment scams. A downloadable checklist covering these signs is available in the SEC's Red Flags of Investment Fraud Checklist.
Affinity fraud and targeted schemes
Many Ponzi schemes are built on affinity fraud, in which the promoter shares or claims to share a religious, ethnic, immigrant, military, or workplace connection with the people being targeted, which lowers their guard and makes the pitch feel trustworthy, according to the SEC's Division of Enforcement. The SEC notes that many affinity-fraud cases turn out to be Ponzi or pyramid schemes, where new investors' money is used to create the appearance of success or to pay off earlier investors until the scheme collapses. The SEC has also issued specific investor alerts on Ponzi schemes targeting seniors and on Ponzi schemes using virtual currencies, both of which describe how the same underlying structure has been adapted to newer marketing channels and payment methods.
Checking before investing
Before putting money into any investment opportunity, the SEC recommends verifying that the investment and the person selling it are actually registered, since securities professionals and firms generally must be licensed or registered and registration provides information about a company's management, products, and finances, per Investor.gov. Investors can check a broker's or adviser's background using the Check Out Your Investment Professional tool, and can research a company's own SEC filings directly through EDGAR. This article describes how these frauds operate and how regulators define them; it is not investment advice, and it does not evaluate or recommend any specific investment.
Reporting a suspected Ponzi scheme
Anyone who suspects a Ponzi scheme, or who has already lost money in one, can report it confidentially to the SEC's Division of Enforcement through the online Tips, Complaints & Referrals form, which is the SEC's designated channel for suspected fraudulent or unregistered securities offerings, Ponzi or pyramid schemes, and high-yield investment programs, per the SEC's reporting guidance. The form itself is available at sec.gov's tip and complaint portal, and eligible whistleblowers who submit original information may qualify for an award and anti-retaliation protections under the SEC Whistleblower Program. Anyone currently being pressured to send money into an investment that shows these warning signs should stop communicating with the promoter and not send any funds, consistent with the SEC's guidance on common investment scams, and can also contact FINRA or a state securities regulator listed through the North American Securities Administrators Association for additional help.