A promissory note is a form of debt, similar to a loan or an IOU, that a company may issue to raise money. Typically, an investor agrees to loan money to the company for a set period of time. In exchange, the company promises to pay the investor a fixed return on his or her investment, typically principal plus annual interest.

While promissory notes can be legitimate investments, those that are marketed broadly to individual investors often turn out to be scams. The SEC and state securities regulators across the nation have joined forces to combat the fraudulent sale of promissory notes to investors. But we can't stop every fraud.

ANATOMY OF A PROMISSORY NOTE FRAUD 

Fraudsters across the nation have recently begun to use promissory notes as vehicles to defraud investors out of hundreds of millions of dollars. Most promissory note scams follow predictable, fraudulent fact patterns:

The Fraudsters
They may or may not be affiliated with the company.  The fraudsters persuade independent life insurance agents to sell promissory notes, luring them with lucrative commissions of up to twenty or even thirty percent. These agents often do not have a license to sell securities. And in selling the notes, they frequently rely solely on the information the company gives them – which later proves to be false or misleading.

Investors purchase the promissory notes
People are enticed by the promise of a high, fixed-rate return, up to fifteen or twenty percent, with a low level of risk. The promissory notes may appear all the more attractive because the seller falsely claims that they're guaranteed or insured. Few investors ask tough questions about these investments because they know and trust the sellers, insurance agents with whom they've done business in the past.

The fraudsters use a portion to pay commissions
The money they collect from investors is used to pay the sellers their commissions. They typically abscond with the rest, squandering it on personal expenses or high-flying life styles.

They use pyramid schemes to pay interest
They may also use some of the proceeds to support an elaborate Ponzi scheme in which money coming in from the sale of new notes pays the interest on older notes. Some fraudsters try to avoid repaying investors' principal by convincing investors to roll-over their promissory notes upon maturity. These investors may, for at least a time, continue to receive interest payments but they rarely get their principal back.

Nobody is immune from fraud
Promissory note scams often target the elderly, bilking them of their retirement savings at a time when they can least afford to lose it. However,  no one is immune. Fraudsters rarely discriminate when it comes to separating investors from their money. Most investors don't even realize their investment dollars are at risk until it's far too late.

TIPS TO AVOID PROMISSORY NOTE SCAMS 

Here's how you can avoid the costly mistake of investing in a sham promissory note:

Bear in mind that legitimate corporate promissory notes are not usually sold to the general public. 
Instead, they tend to be sold privately to sophisticated buyers who do their own due diligence or research on the company. If someone calls you up or knocks on your door trying to sell you a promissory note, chances are you're dealing with a scam.

Whether the investment is registered with the SEC or your state securities regulator
(Or whether it's exempt from registration.) Most legitimate promissory notes can easily be verified by checking the SEC's EDGAR database or by calling your state securities regulator. If the note is not registered, you'll have to do your own investigation to confirm whether the company has the ability to pay its debt.

Be skeptical 
If the seller tells you that the promissory note is not a security, investigate further. The types of promissory notes involved in promissory note scams usually are securities and must be registered with either the SEC or your state securities regulator – or they must meet an exemption.

Make sure the seller is properly licensed. 
Insurance agents can't sell securities – including promissory notes – without a securities license. Call your state securities regulator, and ask whether the person or firm is licensed to sell securities in your state and whether they have a record of complaints or fraud. You can also get this information from FINRA.

Beware of promises of risk free returns. 
These claims are usually the bait con artists use to lure their victims. Always remember that if it sounds too good to be true, it probably is.

Check the backing and issuer origin
Watch out for promissory notes that are supposedly insured or guaranteed, especially if a foreign insurance company is involved. Be sure to call your state insurance commissioner to find out whether the foreign insurance company can legally do business in the United States.

Check other investments
Compare the rate of return on the promissory note with current market rates for similar fixed-rate investments, long-term Treasury bonds, or FDIC-insured certificates of deposit. If the seller promises an above-market rate on a short-term note, proceed with caution.
 

Please note that OldStocks.com does not sell investments or investment advice.  It is highly recommended that you contact a registered investment professional for these services.   Items sold in our catalog are cancelled or obsolete, and only sold as collectible items.