Vending Machine Ponzi Schemes

Recently I'd come across a discussion about a certain brand using vending machines. I'd seen a few of these machines around Brisbane and the Gold Coast, along with other novelty machines, but I've never seen anyone actually use any of them. The discussion was around a scheme offered to "investors" for a 100% passive income stream. The scheme was simple: Front up $25,000 for the machine, and they provide a guaranteed flat 12% per annum return. The company takes care of maintenance, stocking, etc. 12% p.a. from a machine that I have never seen anyone actually use after expenses?  How?

Schemes like this amount to a fairly simple variant of a Ponzi. By definition a Ponzi scheme takes your investment funds and guarantees a return. It pays that return regularly using the money you initially invested, and money invested by the people that follow. Many Ponzi schemes start off as a legitimate investment scheme that want to attract enough capital to achieve an optimistic scenario that will actually have the potential to earn more than the incentive. They implode when that scenario does not materialize and the scheme starves itself of capital. The people that got in early essentially got most of their money back, or possibly a profit from the scheme, provided they didn't reinvest those earnings back in the scheme. The people that got in late will get virtually nothing.

So, how does a scheme like this potentially work?  First we look at the investment amount: $25,000 per machine. Now, there is absolutely no way these machines cost $25,000. The real figure for the machine is probably South of $2,500, but we'll use $2,500 as an example. The company gets investors to invest $25,000 for each machine, guaranteeing a 12% p.a. return, or $250/mo. Their cost for the machine is $2,500, so they now have $22,500 per machine in the bank. Now, starting off there will be people interested, but skeptical. They might only get 10 initial investors. They need to combat the skepticism so they pay their investors back their $250/mo. like clockwork. Investors can sign up for a 2 year or 5 year investment agreement. After 2 years they will have been paid back $6,000, after 5 years, $15,000. What most don't realize is that this money is just coming back from the $25,000 that they originally invested. Still, on paper it looks like the scheme is delivering exactly what the investors signed up for. Positive reviews and testimonials start flowing in and skepticism in the scheme is dispelled.

At the end of their investment term, the scheme is quite careful to indicate that they will have that $6/15k plus their initial investment available to "reinvest". They want to keep the initial $25,000 in the scheme towards new, additional machines. Some of the early investors may request a buy-out to get back all or most of their initial $25,000 and provided the scheme hasn't gotten sloppy yet, it will reluctantly oblige to pay these people out. At least some of these people are testing the waters and when they get their payout, they will reinvest, satisfied the scheme is sound. At minimum it provides absolute confidence that the 12% guaranteed return is potentially real. However, their real goal is to keep what remains of the initial investment in the scheme, and draw back in that payout, plus more capital from the original investors.

The purpose of the scheme is to build up market share, to saturate the new market with their brand before competitors. The machines are essentially billboards that are capable of displaying advertisements. Once their machines are everywhere their objective is to be able to negotiate advertising agreements for an additional revenue stream to their product sales. The first question any skeptic has when presented with a scheme that looks too good to be true is: "If the return is so great, why aren't they using their own money?" The answer is pretty simple, they are, but to grow fast they need more capital and why go through the effort to convince a bank (and pay interest/provide collateral) when you can convince the public?

How the scheme implodes: This depends a lot on a number of factors, largely what happens to the net difference between the initial investment and the operating costs. The above example is extremely simple. These machines do require maintenance due to whatever use they actually manage to attract, plus dealing with vandalism and the like. The operators of the scheme will undoubtedly be drawing down a salary, plus there are advertising costs to promote the scheme. Provided investors keep their money invested in the illusion of a 12% return the scheme can be sustained for quite some time while new machines are rolled out. For every $25k, the scheme operators could potentially choose to roll out 2, or maybe even 5 new locations, but they have to watch the cash flow carefully. Their goal is to get to a critical mass to get that new revenue stream, but there is no guarantee that the revenue will materialize. Ultimately they are working against the clock because while investors will be satisfied initially that they are getting their $15000 return after 5 years, they are going to be expecting their $25,000 capital outlay back, and the simple fact is that the scheme does *not* have enough cash to pay very many of these investors out.

Anyone considering a scheme like this should hopefully be quite wary of the possibility of getting their initial investment back at the end of the agreement and not blindsided by the fact that people currently in the scheme are getting their promised 12% payments each month without fail. If there is one thing to think about, it is depreciation. If a machine really cost $25,000, how much would it be worth after 5 years of use? The schemes will claim that the machines are effectively owned by you, where they take care of the maintenance etc. to re-assure you in case anything were to go wrong. When the scheme collapses you may very well find yourself the owner of one or more of these machines, with retail space rent owed, and a machine worth a few hundred dollars in used parts that you need to remove and find storage for. You invested $25,000, got back maybe $15,000 and a proprietary vending machine for a brand that no longer exists.

Is it illegal? The thing about Ponzi's is that they are like a market bubble. They're easy to spot after the fact, and while "Bears" might point fingers at them, authorities typically only act on them once something does go wrong. The perpetrators of these schemes are generally people with very eager ambitions that believe it's better to attempt something and ask forgiveness than forever seek permission. The 12% guarantee is an incentive to attempt to attract enough interest to hit critical mass. The questions you need to ask are:

- Is this criminally motivated or is it merely eager ambition?
- How realistic are their goals and possible revenue? is > 12% really achievable?
- Can I afford to lose some/most of this money to find out for sure?