Promissory Note Scams: What You Need to Know

by InvestorLawyers on March 29, 2012

in FINRA,SEC,Securities Fraud,Unregistered Securities

With promissory note scams on the rise, investors need to know both how to spot them and when they need to contact a stock fraud lawyer if they suspect fraud has occurred. Promissory notes are a type of debt sometimes used by companies in order to raise money. Through the note, the company promises to return the investor’s principal and pay fixed interest amounts. They have set terms and repayment periods that should be stated specifically in the note.

Promissory Note Scams: What You Need to Know

According to securities arbitration lawyers, fraudulent promissory notes come in three main forms:

  1. Some are fraudulent from the beginning and exist only to convince investors they are entering into a contractual arrangement when, in reality, they are not.
  2. Some are real securities that, despite the fact that they should be registered with regulatory bodies, bypass registration and are sold as unregistered securities.
  3. Some are marketed and sold by unregistered sellers when registration of the seller is a requirement.

Investors should be aware of a few “red flags” that indicate a promissory note is fraudulent and a securities arbitration lawyer should be contacted. These include:

  • Deceptive statements or promises, such as very high returns, guaranteed returns and guarantee by collateral backing.
  • High-pressure sales strategies that attempt to persuade an investor to make a decision immediately.
  • Claims that the note is part of a limited offering. Legitimate notes are usually sold through a corporate offering to sophisticated buyers.
  • Unregistered status. A promissory note’s registration status can be checked via SEC databases.
  • The note is not being sold through the broker’s firm. Brokers may not sell investments outside their firm, therefore this is a good indication of fraud.

Investors who believe they have been the victim of a promissory note scam may be able to recover their losses through securities arbitration. To find out more about your legal rights and options, contact a stock fraud lawyer at The Law Office of Christopher J. Gray at (866) 966-9598 for a no-cost, confidential consultation.

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