Promissory notes are a form of debt that companies use to raise money. Investors loan money to a company. In return, investors are promised a fixed amount of periodic income. Typically, the rate of return promised is very high. And, the level of risk promised is very low.
Promissory notes can be appropriate investments for many investors. But, promissory notes that are sold broadly to individual investors are often scams.
What you can do to avoid promissory note fraud:
- Typically, promissory notes are securities. They must be registered with the SEC, a state securities regulator, or be exempt from registration. Most legitimate promissory notes can easily be verified by checking the SEC’s EDGAR database or calling your state securities regulator.
- The seller must be properly licensed to sell securities. Check your investment professional’s registration status using our free search tool on IAPD or at Investor.gov. Or call your state securities regulator.
- Compare the rate of return on the promissory note with current market rates for similar investments. Similar investments would be fixed rate investments, long term Treasury bonds, or FDIC insured certificates of deposit. If the seller promises a higher rate, proceed with caution.
- Be cautious if the seller promises “risk free,” “insured,” or “guaranteed returns.” These claims are usually the bait con artist use to lure their victims. Always remember that if it sounds too good to be true, it probably is.