It works like this:
One day, Barry wakes up. Barry is a bit of an unscrupulous character with a bit of guile about him. Barry is making £16k a year doing some dead end job with a nice sounding title. Barry decides he wants more cash and has a eureka moment. Barry decides he's going to pretend to invent a perpetual motion machine, and become much more wealthy, completely legally, without it ever working. Here is what Barry does:
1] He sets up a new company with himself as the only shareholder.
2] He finds one or two other people who also want to make a bit of shady cash, who know the product won't work, who have notable experience in the field and CVs that look quite good.
3] He offers them each 20% or so of the business in order join him in his venture. Together they put together some queer looking prototypes while working their main jobs.
4] They pool a few grand of savings and get some brochures made up for potential investors.
5] They buy a list of potential incubators/angel investors that might be interested and mail off the brochures, first renting some warehouse/office space.
6] They entertain the investors with big cakes and cups of tea, demonstrating their "prototype" close to working. They tell the investors it will be bigger than nuclear power, and they will own patents worldwide on it.
7] 95% of the investors recognise it's a scam and leave.
8] 5% of the investors don't, and each one gives hundreds of thousands (or millions) of pounds in injection capital to the company in return for a 10% stake.
9] Now, with a million squids in the bank, Barry starts to pay himself an arbitrary salary, say £150,000 as CEO. His two mates get a £100,000 salary each.
10] They quit their day jobs and start fannying around with press relations, marketing materials, making their prototype glow a bit brighter, make a nicer noise etc.
11] Research like this takes a lot of time they tell the investors. Come back next year.
12] See step 11.
13] We're getting close now, but *we need more money* as the original injection will run out at the end of this year (year 3). Barry has some far more professional marketing materials created using money from the first set of investors and posts them to even more potential investors. They look far more credible because they've been running three years, and because several companies have already invested money. "We're professionals, don't you know"
14] Another 4 million is pumped into the company from new investors.
15] Barry and his friends double their annual salaries. Maybe hire a few students straight out of uni for £14k a year plus "stock options" to make it look legit.
16] Three years later, we're back at step 13.
Now, assuming at this point that everyone involved works out it's a scam (some companies that never release a product can have 4,5,6 rounds of escalating funding) and they decide to fold the company.
No-one can accuse Barry and his friends of doing anything illegal - after all you can't prove they knew for sure the device would not work. Their intentions were "honest" guv'nor!
So, after 6 years Barry and his mates invested a thousand pounds or so in cash into the company. If Barry had stayed in his old job, he would have earned:
£96,000 less tax
Instead, CEO Barry over the last 6 years earned:
£1,350,000
Barry has since bought a nice house in the country and cleverly banked over half a million quid (he has enough money to pay an accountant to offshore all his earnings, meaning he pays little to no tax - certainly less tax than you or I). If he is willing to live frugally (still take holidays and stuff, just no yachts or private jets) Barry can now retire to the country after 6 years of doing no genuine work whatsoever.
No-one got "conned", nothing illegal was done, but Barry got rich and some investors lost a bit of cash. The government/crown prosecution service/whatever has NO REASON to step in and stop anything... this is just business. And this **** goes on every damn day.
