For a Ponzi scheme to work it's important that the early investors not cash out for a long time. They see their investment rise in value and talk about it but don't cash out until almost the very end.

Sounds to me more like Groupon is going down already, at least it's being talked down. I could be wrong but I'm wouldn't buy any shares even if I could.

So what does it tell you that the earliest investors are all cashed out already?

The Groupon IPO could easily not happen, given the current market turmoil and the SEC scrutiny. If forced to wait several months before the IPO, the company may need to raise more money privately, or could basically fail and fall into the arms of a suitor like Google.

Groupon is not a Ponzi scheme. In the process of raising money from late stage investors, Groupon has to say what the funds will be used for, which includes paying off earlier investors.

Using investment money to pay off earlier investors while claiming to be profitable to drive further investment is the definition of a Ponzi scheme.

They probably don't mean for that to be their business model, but it is what it is.

Groupon is making a fist ton of cash. If they stopped spending money on hiring and marketing, they'd be wildly profitable. Investors have access to all this information.

Also, Groupon has a clear formula for growing and how long it takes that new business to become profitable. That is why they can raise so much investment.

If you can come up with a convincing argument why Groupon is a Ponzi scheme, then call the law enforcement. You'll get on the news for sure!

@watchandwait: They could also stop customer acquisition temporarily to get costs in line at the risk of not growing. Better than going BK which seems possible given how much they are spending for each customer.

Other companies have already gone public that filed around the same time as them (although raising less $) - which may hint that institutional investors aren't buying their story (the SEC making them disclose their actual losses instead of a BS metric certainly isn't going to help either).

A Ponzi scheme uses investors' money to disguise a complete lack of legitimate revenue. Groupon really is doing business, though it's trying to make its subscriber value vs. cost structure look less fatal than it may be.

They're doing business at a loss— they're doing negative business.

So, okay, maybe they're going to become profitable (in real life) at some time soon in the future and we'll all feel a bit silly. But if that's the case, then why would they be using investment capital to pay off early-stage investors now— when they're just on the brink of profitability, starting an IPO, their value sure to skyrocket? What employee decides to cash out under these circumstances?