Securities and Exchange Commission (SEC) investigations have revealed that promissory note scams are on the rise. In fact, promissory note schemes have robbed hundreds of investors of tens of millions of dollars. The promise of high guaranteed rates of interest combined with today's volatile markets should alarm investors to make an adequate investigation before investing. This is because unlike many investments today, promissory notes tout a simple and safe concept, but they also offer returns as high as 25 percent. Even though they can be legitimate investments, some promissory notes sold widely to individual investors turn out to be fraudulent. Therefore, investors need to fully understand the promissory note they are considering, and they need to be aware of warning signs that may signal a scam.
A promissory note is a debt instrument that companies use to raise capital. The company issues the notes and promises to return the purchaser's funds and to make interest payments to the buyer in exchange for the borrowed money. Promissory notes have set repayment periods ranging from a few months to several years. Legitimate promissory notes oftentimes face significant risks - the issuing company may have problems such as competition, bad management, or severe market conditions that make it nearly impossible for the company to fulfill its promise to pay interest and principal to note buyers. Investors should also note that bona fide notes are marketed almost exclusively to corporate and other sophisticated investors, who have the resources and expertise to make a sound investment decision.
Problems with promissory notes fall into three main categories: fraud and deception, unregistered securities, and unregistered sellers. Fraudulent promissory note programs often consist of deceptive statements to lure in investors. Callers tout high, guaranteed returns and collateral to back the notes. Promissory note schemes usually target the elderly and their retirement savings. Promissory notes must be registered with the SEC or the state in which they are sold if they are not subject to a registration exemption. If the note is unregistered, it will not be subject to review by regulators before it is sold, and investors have to do their own research to verify that the company can meet its obligations. If registered brokers are involved, they may be selling the notes without a license or without their firms' approval.
Investors should consider the following before investing in a promissory note:
-Ask why the seller wants to sell to you: Bona fide corporate promissory notes are generally sold to sophisticated investors. The fact that promissory notes are being sold to individual investors is itself a danger signal.
-Be wary of pushy sales tactics: No reputable investment professional should push an investor to make an immediate decision about an investment or tell you to act now.
-Use on-line resources: The SEC's EDGAR Database and the state's securities regulator offer information on whether the notes are registered. The Financial Industry Regulatory Authority's (FINRA) BrokerCheck will reveal if the individual selling the promissory notes is registered or has a disciplinary history.
-Broker role: The promissory note should be sold through the broker's firm. If not, it is being "sold away," which means that the associated broker-dealer has not approved the note for sale.
-Guaranteed returns: Salespersons cannot guarantee returns. Even if the seller says that the promissory notes are insured, be wary - the insurer may not be legitimate or offshore.
-High returns: Promissory notes usually offer double digit returns - those greater than 10 percent while other fixed income investment are yielding much less. The rule is: the higher the return, the greater the risk.
-Commissions: The salesperson's commission is important. Normal commissions rarely exceed 5 percent. Promissory notes offer much more - as high as 30 percent or more.
-Issuing Company: How the company issuing the promissory notes plans on generating returns to make the interest payments should be vital to an investor's decision to commit to the notes.
Have you suffered losses in a promissory note investment scam? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
A promissory note is a debt instrument that companies use to raise capital. The company issues the notes and promises to return the purchaser's funds and to make interest payments to the buyer in exchange for the borrowed money. Promissory notes have set repayment periods ranging from a few months to several years. Legitimate promissory notes oftentimes face significant risks - the issuing company may have problems such as competition, bad management, or severe market conditions that make it nearly impossible for the company to fulfill its promise to pay interest and principal to note buyers. Investors should also note that bona fide notes are marketed almost exclusively to corporate and other sophisticated investors, who have the resources and expertise to make a sound investment decision.
Problems with promissory notes fall into three main categories: fraud and deception, unregistered securities, and unregistered sellers. Fraudulent promissory note programs often consist of deceptive statements to lure in investors. Callers tout high, guaranteed returns and collateral to back the notes. Promissory note schemes usually target the elderly and their retirement savings. Promissory notes must be registered with the SEC or the state in which they are sold if they are not subject to a registration exemption. If the note is unregistered, it will not be subject to review by regulators before it is sold, and investors have to do their own research to verify that the company can meet its obligations. If registered brokers are involved, they may be selling the notes without a license or without their firms' approval.
Investors should consider the following before investing in a promissory note:
-Ask why the seller wants to sell to you: Bona fide corporate promissory notes are generally sold to sophisticated investors. The fact that promissory notes are being sold to individual investors is itself a danger signal.
-Be wary of pushy sales tactics: No reputable investment professional should push an investor to make an immediate decision about an investment or tell you to act now.
-Use on-line resources: The SEC's EDGAR Database and the state's securities regulator offer information on whether the notes are registered. The Financial Industry Regulatory Authority's (FINRA) BrokerCheck will reveal if the individual selling the promissory notes is registered or has a disciplinary history.
-Broker role: The promissory note should be sold through the broker's firm. If not, it is being "sold away," which means that the associated broker-dealer has not approved the note for sale.
-Guaranteed returns: Salespersons cannot guarantee returns. Even if the seller says that the promissory notes are insured, be wary - the insurer may not be legitimate or offshore.
-High returns: Promissory notes usually offer double digit returns - those greater than 10 percent while other fixed income investment are yielding much less. The rule is: the higher the return, the greater the risk.
-Commissions: The salesperson's commission is important. Normal commissions rarely exceed 5 percent. Promissory notes offer much more - as high as 30 percent or more.
-Issuing Company: How the company issuing the promissory notes plans on generating returns to make the interest payments should be vital to an investor's decision to commit to the notes.
Have you suffered losses in a promissory note investment scam? If so, call Robert Pearce at the Law Offices of Robert Wayne Pearce, P.A. for a free consultation.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
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