I have been actively engaged in the promissory note business for over 40 years. My and my wife's self-directed IRA accounts have been invested in notes for the same length of time. My note investments have been the foundation of my estate building. Because I believe that promissory notes can be an excellent investment vehicle for the average investor, I try will try explain what they are and how they work. But, I will also point out that notes can be misused and abused by dishonest people and by ignorant people. This article is the first of several articles in which I will attempt to inform the average investor about the benefits and warn the average investor about the detriments of investing in notes. Obviously, there is no perfect investment.
Just as cars do not injure and kill people (bad drivers do), promissory notes do not trick and harm people (dishonest or ignorant sellers of promissory notes do).
What Promissory Notes Are: Generally, promissory notes are a form of debt similar to a loan. Companies and individuals issue these notes to finance a wide variety of endeavors. Bona fide notes are an important means by which companies and individuals raise capital. However, not all notes are legitimate and investors must be mindful of potentially tricks, deception, and exaggerations. Not all notes are created equal.
Promissory Notes Often Are Securities: In many instances, these investments are promoted as not involving the sale of securities, either by the issuers of the notes or by salespersons. The Securities Act of 1933 and the Securities Exchange Act of 1934, however, include "any note" in the definition of a security. From these definitions, a legal presumption has been developed that a note is considered to be a security, although this presumption may be overcome if, based on all facts and circumstances, the instrument is deemed to be a commercial-type loan. In many cases, notes are construed to be securities. In some cases they are not. Fraudulent Note Programs: In recent years, securities regulators have uncovered a number of fraudulent schemes involving notes. Increasingly, promissory note investments are one of the vehicles of choice when unscrupulous promoters go after investors' funds. Promissory notes can be a legitimate investment, yet sales of notes to individuals may involve a scam. And, some notes are intended to be legitimate, but are so poorly constructed that they are in fact worthless. I want to give you the tools to evaluate these investments and questions to ask.
• High interest rate or above-market returns. This should always raise questions. Ask how can this note investment pay such high rates or returns and does it make sense. Listen very carefully to the answer.
• "Guaranteed returns," "risk free" or any word that signals low risk. Can anyone promise a return on your money without risk? Is there any investment that comes without risk? Ask these questions and be sure you understand how this is possible. Listen very carefully to the answer. RED FLAGS:
Too-good-to-be-true testimonials.The note seller may say that a "well-established" company is looking to expand its business and needs to raise capital. Instead of borrowing money from a traditional lender, such as a bank, it is offering investors an opportunity to purchase "promissory notes," typically with a maturity of nine months and an annual interest rate between 12% - 18%, far more than you could get elsewhere The seller's representation is that the notes are very secure while offering interest rates that are extremely attractive. What more could any investor want? But, just remember, promises are only as good as the person making them. Be very careful about who you deal with. Investigate and ask questions. As former president Regan said, "trust but verify!"
Fancy words and gold lettering are no substitute for real, honest financial information. Investors often receive fabricated note certificates complete with fiscal and legal-sounding terminology and gold embossed seals. These notes are often established as window-dressing for a ponzi scheme.
Words that wave a red flag. Use of the following words: perfect offer, confidential, sure-fire, removes doubts, secret, cinch, always, lazy way, anyone can make a killing, removes risk, easy money, easily determine market value, air-tight, take the fear out, risk-free, judgment proof, insider, painless, fool-proof, safe, win/win, removes guesswork, easy, magic, bulletproof, gold mine, complete, riches, This is not a get-rich-quick scheme, automatic, dream stealer, no-brainer, wealth, nothing down, cookie cutter, global, pro creative, money machine, wiz program, Hawaii, success, quick, offshore, foreign, boot camp, course, discount, fortune. Company names that sound like non-profit or government organizations. national, institute, education, bureau, association, co-op or cooperative, club, land bank, extension, U.S. or United States or American, university, college, trust, network, acronyms that end in MAE or MAC and which are therefore designed to sound like the federally-related mortgage organizations FNMA (called "Fannie Mae'~ or FHLMC called "Freddie Mac's.
Just as cars do not injure and kill people (bad drivers do), promissory notes do not trick and harm people (dishonest or ignorant sellers of promissory notes do).
What Promissory Notes Are: Generally, promissory notes are a form of debt similar to a loan. Companies and individuals issue these notes to finance a wide variety of endeavors. Bona fide notes are an important means by which companies and individuals raise capital. However, not all notes are legitimate and investors must be mindful of potentially tricks, deception, and exaggerations. Not all notes are created equal.
Promissory Notes Often Are Securities: In many instances, these investments are promoted as not involving the sale of securities, either by the issuers of the notes or by salespersons. The Securities Act of 1933 and the Securities Exchange Act of 1934, however, include "any note" in the definition of a security. From these definitions, a legal presumption has been developed that a note is considered to be a security, although this presumption may be overcome if, based on all facts and circumstances, the instrument is deemed to be a commercial-type loan. In many cases, notes are construed to be securities. In some cases they are not. Fraudulent Note Programs: In recent years, securities regulators have uncovered a number of fraudulent schemes involving notes. Increasingly, promissory note investments are one of the vehicles of choice when unscrupulous promoters go after investors' funds. Promissory notes can be a legitimate investment, yet sales of notes to individuals may involve a scam. And, some notes are intended to be legitimate, but are so poorly constructed that they are in fact worthless. I want to give you the tools to evaluate these investments and questions to ask.
• High interest rate or above-market returns. This should always raise questions. Ask how can this note investment pay such high rates or returns and does it make sense. Listen very carefully to the answer.
• "Guaranteed returns," "risk free" or any word that signals low risk. Can anyone promise a return on your money without risk? Is there any investment that comes without risk? Ask these questions and be sure you understand how this is possible. Listen very carefully to the answer. RED FLAGS:
Too-good-to-be-true testimonials.The note seller may say that a "well-established" company is looking to expand its business and needs to raise capital. Instead of borrowing money from a traditional lender, such as a bank, it is offering investors an opportunity to purchase "promissory notes," typically with a maturity of nine months and an annual interest rate between 12% - 18%, far more than you could get elsewhere The seller's representation is that the notes are very secure while offering interest rates that are extremely attractive. What more could any investor want? But, just remember, promises are only as good as the person making them. Be very careful about who you deal with. Investigate and ask questions. As former president Regan said, "trust but verify!"
Fancy words and gold lettering are no substitute for real, honest financial information. Investors often receive fabricated note certificates complete with fiscal and legal-sounding terminology and gold embossed seals. These notes are often established as window-dressing for a ponzi scheme.
Words that wave a red flag. Use of the following words: perfect offer, confidential, sure-fire, removes doubts, secret, cinch, always, lazy way, anyone can make a killing, removes risk, easy money, easily determine market value, air-tight, take the fear out, risk-free, judgment proof, insider, painless, fool-proof, safe, win/win, removes guesswork, easy, magic, bulletproof, gold mine, complete, riches, This is not a get-rich-quick scheme, automatic, dream stealer, no-brainer, wealth, nothing down, cookie cutter, global, pro creative, money machine, wiz program, Hawaii, success, quick, offshore, foreign, boot camp, course, discount, fortune. Company names that sound like non-profit or government organizations. national, institute, education, bureau, association, co-op or cooperative, club, land bank, extension, U.S. or United States or American, university, college, trust, network, acronyms that end in MAE or MAC and which are therefore designed to sound like the federally-related mortgage organizations FNMA (called "Fannie Mae'~ or FHLMC called "Freddie Mac's.
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