PROMISSORY NOTES:

PROMISES, PROBLEMS

BEFORE YOU INVEST, INVESTIGATETM
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P R OMISSOR Y N O T E S : P R O M I S E S, P R O B L E M S

This brochure was produced by the North

American Securities Administrators

Association, FINRA, the Securities and

Exchange Commission and the Securities

Industry and Financial Markets Association. 

Illustrator: Giora Carmi 
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P R OMISSOR Y N O T E S : P R O M I S E S, P R O B L E M S

PROMISSORY NOTES:

PROMISES, PROBLEMS

Many investors seek out safe, fixed-rate investments, especially ones that can boost the interest they

earn. You, too, may be looking for sound investments

that pay better than average interest to generate

income or meet the needs of your overall investing

plan. But as you consider new investment products or

services, always remember the correlation between risk

and reward: every investment involves some degree of

risk, and the greatest-yielding investments usually

carry the highest levels of risk.

One interest-paying investment is the promissory

note. These are an important means by which companies raise capital. Legitimate promissory notes are

marketed almost exclusively to sophisticated or corporate investors that have the resources to research

thoroughly the companies issuing the notes and to

determine whether the issuers have the capacity to pay

the promised interest and principal. 
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P R OMISSOR Y N O T E S : P R O M I S E S, P R O B L E M S

For sophisticated or corporate investors, promissory

notes can be a good investment. These instruments

provide a reasonable reward for those who are willing

to accept the risk. However, promissory notes that are

marketed broadly to the general public often turn out

to be scams. And even legitimate notes carry some

risk that the issuers may not be able to meet their

obligations.

Unfortunately, there have been many instances of

unscrupulous individuals pushing bogus promissory

notes. They’re being sold as instruments that guarantee above-market, fixed interest rates, while

safeguarding their principal. While fraudulent promissory notes appear to give investors the two things

they desire most — higher returns and safety — they

may not be worth the paper they’re printed on.

Remember, if something sounds too good to be true,

it probably is.

PROMISSORY NOTES: SCHEMES AND SCAMS

Here are examples of how investors lost their

money in promissory note schemes:

At least 100 investors nationwide invested more

than $4 million in promissory notes that promised to

pay an interest rate of 13 percent over nine months.

The funds were for a company selling premium coffee

at drive-through kiosks. Slick marketing materials

hyped the company, which collapsed and defaulted on

its notes. Investors lost all of their principal. 

Investors in Georgia lost more than $2.5 million in a

‘risk-free’ investment after purchasing promissory notes

that would pay for new ambulances for a start-up company. There were never any ambulances, only worthless

notes that generated high commissions for the sellers. 

Kansas investors lost more than $1.3 million to a

local veterinarian who solicited money from friends

and fellow church members for investment in his

fraudulent cattle embryo business. Investors were

issued promissory notes and told that they would

receive a 5 to 15% return within 1 to 6 months. An

investigation showed the money was not invested in

an embryo transfer program, but used in part to make
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P R OMISSOR Y N O T E S : P R O M I S E S, P R O B L E M S

interest payments to earlier investors in what is commonly known as a “Ponzi” scheme and for gambling

at local casinos and paying the veterinarian’s property

taxes.

An elderly Wisconsin widow was sold more than

$400,000 in promissory notes by an unlicensed financial advisor who said the notes were safe, guaranteed,

and would earn 12% interest annually. This “advisor”

failed to disclose he was under investigation for theft

in another state and invested her money in his own

name or that of one of his entities. In another case, an

unlicensed individual issued more than $735,000 in

promissory notes to several Wisconsin residents for an

overseas investment that would pay at least $15 million in a very short time. The money was wired to an

off-shore investment scam and the investors are not

likely to see a penny of their investment again.

In Maryland, officials shut down an investment

scheme that used promissory notes and investment

contracts to defraud as many as 1,000 investors of

more than $50 million.

In each of these examples, neither the notes nor the

salespersons were properly registered or licensed. Be

sure to verify the registration or license of the person

who wants you to invest with them. The law requires

that anyone selling securities must be registered or

licensed. (Some states require licensing while others

require registration.) 

HOW PROMISSORY NOTES WORK

Legitimate promissory notes are a form of debt that

is similar to a loan or even an IOU. Companies issue

these notes to finance any aspect of their business,

from launching new products to repaying more

expensive debt. In return for the loan, companies

agree to pay investors a fixed return over a set period

of time. 

Even legitimate promissory notes are not risk-free.

These notes are only as sound as the companies or

projects they’re financing. Promising, smart public

companies can stumble because of competition, 

bad management decisions, or unfavorable market

conditions. If a company’s financial health weakens 
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P R OMISSOR Y N O T E S : P R O M I S E S, P R O B L E M S

suddenly, it may not be able to pay interest and 

principal to investors.

DO THE NOTES NEED TO BE REGISTERED?

Most promissory notes must be registered as 

securities with the SEC and the states in which they’re

being sold. But remember that some promissory

notes, such as those that have nine-month or shorter

terms, may be “exempt.” That means that they don’t

have to be registered. Since these notes fly under the

radar screen of securities regulatory review, they have

been the major source of investor complaints and

fraudulent activity. 

Registration is important because the process 

generally involves what is known as “due diligence.”

In short, that means that financial professionals,

including lawyers and accountants, have looked into

the notes and companies behind the notes. While due

diligence does not guarantee that you will be repaid, it

means that you are much more likely to be given

accurate information that will help you make an

informed decision.

WHO CAN SELL PROMISSORY NOTES?

The salespeople who market promissory notes 

typically include securities brokers, insurance agents,

financial planners, and investment advisers. Since

promissory notes are usually securities, they must be

sold by salespeople who have the appropriate securities

license or registration. 

HOW A SCAM WORKS

Promissory notes have become a vehicle for fraud

primarily because there is a growing investor appetite

for above-market interest rates with little risk. The

sellers of bogus notes promise high, fixed-rate returns

— ranging as high as 15 percent to 20 percent —

coupled with “guaranteed safety.” They market these

notes to individual investors, hoping to lure buyers

who won’t ask how such a high-yield investment could

carry such low risk. 
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In one major regulatory crackdown on the fraudulent sales of promissory notes, securities regulators

nationwide brought 370 actions against firms that

defrauded more than 4,500 investors of $170 million.

The sellers of bogus notes promise high, fixed-rate

returns ranging as high as 15 to 20 percent coupled

with “guaranteed safety.” They market these notes to

individual investors, hoping to lure buyers who won’t

ask how such a high-yield investment could carry such

a low risk.

It’s important to remember that in many of these

cases, investors won’t get their money back because

the fraudsters have already spent it. 

TELLTALE SIGNS OF

PROMISSORY NOTE FRAUD

What are the red flags you should look for when

being offered a promissory note investment? 

Here’s a list: 

“Insured” or “guaranteed” returns. To create a

false sense of safety, the sellers of these notes may say

they “insure” the payment of interest and principal,

using either nonexistent insurers or those that reside

offshore and may not be legitimate or registered to

offer insurance within the United States. 

The promise of above-market returns. Returns

that are higher than those of similar investments

should raise questions. 

“Risk-free” notes. Your risk with promissory notes

is that the issuing company will not be able to make

principal and interest payments. Since risk and

reward are intrinsically related, it pays to remember

that there is no such thing as a low-risk, high-reward

investment.

A start-up’s notes that are labeled “prime quality.”

In the securities industry, prime quality investments

require that a company have an established history of

operations and earnings. So if the company issuing
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the so-called “prime” notes is a start-up or new company, steer clear.

Short-term notes. Notes with a nine-month term

may be exempt from securities registration. 

Notes from a stranger. A call or visit from a

stranger hawking promissory notes is usually a good

sign that the investment is fraudulent. But, remember,

too, that only an investment professional familiar with

your financial situation is in a position to determine if

this investment is appropriate for you. 

YOUR INVESTMENT

CHECKLIST

FULLY RESEARCH THE OPPORTUNITY.

Check with your state securities regulator or the

SEC’s EDGAR database (www.sec.gov) to determine

if a promissory note is properly registered – or

whether it’s exempt from registration. To find your

state regulator, check with the North American

Securities Administrators Association (www.nasaa.org).

If you suspect that your investment is a fraud, be sure

to alert your state regulators or the SEC. 

STEER CLEAR OF NINE-MONTH

PROMISSORY NOTES.

These short-term notes, which are sometimes

exempt from securities registration, have been the

source of most – but not all – of the fraudulent 

activity unearthed by securities regulators in the

promissory note area. Since these notes are sometimes

exempt from registration, you might not be entitled to

some of the redress that the securities laws or regulators provide.

BUY ONLY FROM LICENSED

OR REGISTERED SECURITIES BROKERS.

Insurance agents, financial planners, and investment advisers cannot sell securities – including

promissory notes – without a securities license or 

✓

✓

✓
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registration. You should make sure the broker selling

the note is registered or licensed by contacting your

state securities regulator or the Public Disclosure

Program of FINRA. Call 800-289-9999 or log on to

www.finra.com and click on “About Your Broker” to

verify a broker’s license or registration and obtain a

background report on the broker detailing any existing legal or regulatory problems. 

ASK YOURSELF:

DOES THIS INVESTMENT

MAKE SENSE FOR ME?

Before making any investment, determine what you

are looking for and whether it fits into your portfolio.

Investigate before you invest. And don’t forget to 

consider the risk-reward ratio the investment is 

offering – a higher yield generally means higher risk.

Then comparison-shop. Look for similar or nearly as

high returns with less risk whenever possible.

To learn more about promissory notes, check with

the following:

North American Securities Administrators 

Association (NASAA)

202-737-0900

www.nasaa.org

FINRA

www.finra.org

Securities and Exchange Commission

Office of Investor Education and Assistance

www.sec.gov

Securities Industry and 

Financial Markets Association (SIFMA)

212-313-1200

www.sifma.org
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P R OMISSOR Y N O T E S : P R O M I S E S, P R O B L E M S
NASAA 

Organized in 1919, the North American

Securities Administrators Association is the oldest

international organization devoted to investor

protection. The membership of the voluntary

association consists of 67 state, provincial, and

territorial securities administrators in the 50 states,

the District of Columbia, Puerto Rico, the U.S.

Virgin Islands, Canada, and Mexico. Visit

www.nasaa.org.

FINRA 

FINRA, the Financial Industry Regulatory

Authority, is the largest non-governmental regulator for all securities firms doing business in the

United States. Created in 2007 through the consolidation of NASD and NYSE Member

Regulation, FINRA is dedicated to investor protection and market integrity through effective

and efficient regulation and complementary

compliance and technology-based services.

FINRA touches virtually every aspect of the securities business - from registering and educating

industry participants to examining securities

firms; writing rules; enforcing those rules and the

federal securities laws; informing and educating

the investing public; providing trade reporting

and other industry utilities; and administering

the largest dispute resolution forum for investors

and registered firms. Visit www.finra.org

SEC

The U.S. Securities and Exchange Commision

protects investors and maintains the integrity of

the securities markets. The SEC’s Office of

Investor Education and Assistance provides a

variety of services to address the problems and

questions investors face. Visit www.sec.gov.

SIFMA 

The Securities Industry and Financial Markets

Association represents the industry which powers

the global economy. SIFMA represents more than

650 member firms in all financial markets around

the world. We are committed to enhancing the

public’s trust and confidence in the markets,

delivering an efficient, enhanced member network of access and forward-looking services, as

well as premiere educational resources for the

professionals in our industry and the investors

whom they serve.. Visit www.sifma.org.

©June, 2002; July, 2008
NASAA

750 First Street NE, Suite 1140

Washington, D.C. 20002

(202) 737-0900

(202) 783-3571 (fax)

www.nasaa.org

FINRA

1735 K St., NW

Washington, D.C. 20006

(202) 728-8000

www.finra.org

SEC

Office of Investor Education and Assistance

450 Fifth St., NW

Washington, DC 20549

(202) 942-7040

(202) 942-9634 (fax)

e-mail: help@sec.gov 

SIFMA

120 Broadway - 35th Floor

New York, NY 10271

(212) 313-1200

(212) 313-1301 (fax)

www.sifma.org