The State Corporation Commission’s (SCC) Division of Securities and Retail Franchising cautions Virginians to do their homework before investing in promissory notes.
State securities regulators have identified promissory notes as a leading source of complaints to their agencies. The North American Securities Administrators Association (NASAA), of which the SCC is a member, reported 210 investigations involving promissory notes, which led to 149 formal enforcement actions by state securities regulators last year.
“Promissory notes do not always deliver what they promise,” said Ron Thomas, director of the SCC’s Division of Securities and Retail Franchising. “If an offer sounds too good to be true, it probably is. Educate yourself about any investment; make sure you understand the risks, and know where to turn for help,” he said.
A promissory note is a written promise to pay (or repay) a specified sum of money at a stated time in the future or upon demand, much like a loan or IOU. These notes generally pay interest, either periodically prior to the maturity of the note or in a lump sum at maturity.
Promissory notes are a form of debt that companies sometimes use to raise capital. Typically, they are securities and must be registered with the Securities & Exchange Commission and the states in which they are sold. These debt instruments are usually not sold to the general public. While they may be appropriate investments for corporate and other sophisticated investors, promissory notes sold broadly to individual investors are often scams.
The SCC encourages Virginia investors to be especially leery of short-term promissory notes, particularly those with durations of nine months or less since these notes generally do not require federal or state securities registration. Such short-term notes have been the source of most of the fraudulent activity nationwide involving promissory notes.
Before making any financial decisions, the SCC encourages investors to do their homework, ask questions and get details in writing. Steer clear of unsolicited offers, high-pressure sales tactics and promises that promissory notes are risk-free, high-yield, insured or guaranteed. Make sure that promissory notes and the person offering them are properly licensed or registered and able to satisfy their financial obligation.
“Don’t allow yourself to be rushed to make decisions about an investment you don’t understand,” Thomas said. Contact the SCC’s Division of Securities and Retail Franchising to check that both the seller and investment are registered. If they are not, don’t invest,” he said.
For more information, call the SCC’s Division of Securities and Retail Franchising in Richmond at (804) 371-9051 or toll-free (in Virginia) at 1-800-552-7945. You may also visit the division’s website at www.scc.virginia.gov/srf/ or visit the North American Securities Administrators Association’s website at www.nasaa.org/46329/informed-investor-advisory-promissory-notes.
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