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What is Promissory Note Fraud?

Promissory Note Fraud

Promissory Note Fraud

Have you been a victim of Promissory Note Fraud? According to the SEC, a promissory note is a form of debt, like 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.

Promissory note scams often target the elderly, taking their retirement savings at a time when they can least afford to lose it.

Most promissory note scams look like this:

  • The con artist will  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, because they are promised a high, fixed-rate return such as fifteen to twenty percent,  with a very low level of risk. The seller may claim they are “guaranteed” or insured.
  • The scammers use a portion of the money they collect from investors to pay the sellers their commissions, but they typically keep the rest for themselves.
  • 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.

Tips To Avoid Promissory Note Scams

  • 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.
  • Find out 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, which you can find at the website of the North American Securities Administrators Association.
  • Be skeptical if the seller tells you that the promissory note is not a security. 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 by calling FINRA’s public disclosure hotline at (800) 289-9999 or by visiting their website.
  • Beware of promises of “risk free” returns.  Always remember that if it sounds too good to be true, it probably is.
  • Watch out for promissory notes that are supposedly “insured” or “guaranteed,” especially if a foreign insurance company is involved. Call your state insurance commissioner to find out whether the foreign insurance company can legally do business in the United States.
  • 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.

Free Consultation with Securities Attorneys

The foregoing information is being provided by The White Law Group.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois. For more information on the firm and it’s representation of investors, visit https://whitesecuritieslaw.com. For a free consultation with a securities attorney, please call the firm at 1-888-637-5510.


Tags: , , , , , , , Last modified: February 2, 2023