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Promissory Notes Not Living Up to Promise

The Doss Firm

The Financial Industry Regulatory Authority (FINRA) offers some sound advice when it comes to Promissory Notes. Promissory notes often appear as an attractive alternative to stocks and bonds during this tough economic climate. However, investors need to beware of several problems prior to investing.

A promissory note is a type of debt that a company uses to raise capital. The company, by issuance of the note, promises to return the principal and pay fixed interest payments to the investor for the “loan.” These notes have set terms, which may range from a few months to many years. It is imperative that an investor understand that promissory notes do have risks. Companies issuing the notes could run into problems, such as severe market conditions, bad management, competition, and other issues which may hinder the companies’ ability to pay on the notes. There are legitimate promissory note programs. However, these are “almost exclusively (marketed) to corporate and other sophisticated investors, who have the expertise and information to determine if the investment is a good one.”

FINRA warns that investors should beware of promissory note schemes. There are promissory note programs which are deceptively marketed. Investors should be aware that returns are never guaranteed. Often, promissory note schemes guarantee extremely high returns, typically returns greater than 10%. FINRA warns that the “higher the return, the greater the risk.”

Additionally, promissory notes are normally securities and as such must be registered with the SEC or the State in which they are sold. If the promissory note is unregistered, then it will not be subject to review by regulators before it is sold. This will leave the investigation of the promissory note up to the investor.

Finally, investors should be aware that individuals selling promissory notes are sometimes unregistered sellers and do not have the required securities sales license. FINRA offers a BrokerCheck service, which allows you to see if your broker is registered or has a disciplinary history. You should use this service to check on your broker prior to investing with him/her.

FINRA offers the following advice when considering investing by way of promissory note:
1) Since promissory notes are marketed to sophisticated investors, ask why the seller wants to sell to you an individual investor. This may be a warning sign of a promissory note scheme.
2) Check to see whether the promissory notes are registered with the State in which they are sold and the SEC.
3) Visit FINRA’s BrokerCheck to see if your broker is properly registered and to determine if they have a disciplinary history.
4) If you are using a broker, make sure they are selling with the knowledge of their firm and not “selling away.” If a broker is doing this on the side and outside of the firm, you may not be protected under the firm’s regulatory obligations.
5) Avoid falling for “guaranteed returns.” All investments carry some sort of risk. The seller may assure you that the notes are insured, however, the insurer may not be legitimate.
6) Remember that higher returns carry a higher risk.
7) Know how the broker is getting paid. FINRA explains that commissions rarely exceed 5%. Sometimes promissory notes offer a much higher commission, sometimes as high as 30% or even 50%.
8) Learn about how the company issuing the promissory notes intends on paying the interest on the notes. Determine how the capital the company will raise will be used, whether it will be for marketing and promoter’s costs.

FINRA advises investors that they should receive answers to all of the above questions. Should you not, FINRA says to walk away.

If you are already involved in a promissory note scheme, you may have legal remedies to recover money invested. Contact The Doss Firm to discuss your legal rights. Our first consultation is free. Also, if you would like further information about our firm, please visit

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