Certified Fraud Examiner Practice

Illegal pyramid schemes and Ponzi schemes can indeed qualify as investment contracts under certain conditions due to the specific characteristics that define an investment contract. An investment contract is typically characterized by an investment of money in a common enterprise with an expectation of profits deriving primarily from the efforts of others.

In the context of pyramid schemes and Ponzi schemes, participants often invest their money with the expectation of returning profits that are generated from the recruitment of new participants rather than the traditional business activities. Although these schemes are illegal and designed to defraud investors, the economic reality aligns with the definition of an investment contract. This means they can fall under the regulatory scrutiny that applies to investment contracts, even if they are structured deceptively and are not legally registered.

Additionally, regulatory bodies like the Securities and Exchange Commission (SEC) have historically ruled that such schemes can be interpreted as investment contracts for the purposes of enforcing securities laws. Hence, under certain circumstances, these illegal schemes can be classified as investment contracts, affirming the correct answer.