October 24, 2010
October 16, 2010
The Failed Promises of Promissory Notes
Promissory notes are promoted as safe, lucrative investments. However. many times investors are left with failed promises. Remember that when an investment sounds too good to be true, it usually is.
Promissory notes are short-term debt instruments (similar to a loan or an IOU) frequently sold by little-known or nonexistent companies which are used by a company 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.
Fraudsters (who may or may not be part of a bogus company) brokers persuade clients to make large investments that promise lucrative commissions. What is the catch? The brokers are generally located outside of the US, aren’t licensed to do business in the US, and lack the resources to deliver on promises. The main target for this scam are affluent seniors, but no one is immune.
What is the hook? Investors are tempted by the promise of a high, fixed-rate return (sometimes upward of 15%-30% monthly) with very little or no risk. The notes are highly attractive because the seller will falsely claim that they're “guaranteed” or “insured.” May times the fraudsters will target agents who are the ones approaching their clients to make the presentations to their clients who already have and implicit trust in them.
Red Flags: Watch out for claims “risk-free” investments and promises of fast and "guaranteed" double-digit returns, labels of “prime quality” on a start-up company’s notes, notes for a nine-month period or less, unlicensed sellers, and notes offered to the general public (most are not sold this way).
How to mitigate the risk to fall victim? Ask tough questions – and demand answers – before you consider investing in a promissory note. Be sure you understand how they work and what risks they pose. Here are some tips:
* 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.
* 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. If the promissory note is not registered, you'll have to do your own thorough 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. 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. 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.
* 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.
* 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.
If you believe you've invested in a promissory note scam, act promptly. By law, you only have a limited time to take legal action.
Contact the SEC's Office of Investor Education and Advocacy. You can send us your complaint by using our online complaint form. Or you can reach us as follows:
U.S. Securities & Exchange Commission
Office of Investor Education and Advocacy
100 F Street, N.E.
Washington, D.C. 20549-0213
Fax: (202) 772-9295
Promissory notes are short-term debt instruments (similar to a loan or an IOU) frequently sold by little-known or nonexistent companies which are used by a company 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.
Fraudsters (who may or may not be part of a bogus company) brokers persuade clients to make large investments that promise lucrative commissions. What is the catch? The brokers are generally located outside of the US, aren’t licensed to do business in the US, and lack the resources to deliver on promises. The main target for this scam are affluent seniors, but no one is immune.
What is the hook? Investors are tempted by the promise of a high, fixed-rate return (sometimes upward of 15%-30% monthly) with very little or no risk. The notes are highly attractive because the seller will falsely claim that they're “guaranteed” or “insured.” May times the fraudsters will target agents who are the ones approaching their clients to make the presentations to their clients who already have and implicit trust in them.
Red Flags: Watch out for claims “risk-free” investments and promises of fast and "guaranteed" double-digit returns, labels of “prime quality” on a start-up company’s notes, notes for a nine-month period or less, unlicensed sellers, and notes offered to the general public (most are not sold this way).
How to mitigate the risk to fall victim? Ask tough questions – and demand answers – before you consider investing in a promissory note. Be sure you understand how they work and what risks they pose. Here are some tips:
* 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.
* 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. If the promissory note is not registered, you'll have to do your own thorough 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. 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. 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.
* 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.
* 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.
If you believe you've invested in a promissory note scam, act promptly. By law, you only have a limited time to take legal action.
Contact the SEC's Office of Investor Education and Advocacy. You can send us your complaint by using our online complaint form. Or you can reach us as follows:
U.S. Securities & Exchange Commission
Office of Investor Education and Advocacy
100 F Street, N.E.
Washington, D.C. 20549-0213
Fax: (202) 772-9295
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