In a promissory note scam, the con artists often stay behind the scene. They persuade honest, independent life insurance agents to sell promissory notes by promising them large commissions. The agents often rely on the information they have been given, and they may not know that the information is false or misleading. The fraudsters use a portion of the money they collect from investors to pay the sellers their commissions. They typically abscond the rest. A promissory note is a form of debt, like a loan that a company may issue to raisemoney. An investor generally agrees to loan money to a company in exchange for the company's promise that will pay back the amount, plus interest, over a specific time period. In general, promissory notes are not sold to the general public. Most promissory notes are often sold by independent life insurance agents. Notes may be issued on behalf of companies that don't exist. Insurance agents may tell investors the notes are a safe investment since they are guaranteed by insurance companies. However, most of the companies that guaranteed the notes are unlicensed. The attraction of promissory notes is that elderly investors believe the notes won't expose them to the risks of the general securities market. Investors purchase the notes believing they are less risky and offer a higher-than-market rate of return. Insurance agents may encourage investors to cash-in their life insurance policies and buy promissory notes instead. Part of the money raised through a promissory note scam may be used to pay off insurance agents' commissions and then abscond with the rest of the money.
To avoid promissory note scams, investors should check out the sales person who is selling the promissory notes. Generally, these sales persons must be licensed in the state and the National Association of Securities Dealers. Investors need to also research whether the company offering promissory notes is legitimate and healthy to pay its debts. Be skeptical of notes that are supposedly insured or guaranteed or notes that promises to be risk-free, high yield.
For more information, see:
- Securities and Exchange Commission (SEC): http://www.sec.gov/investor/pubs/promise.htm The SEC provides a warning on Promissory Note Fraud.
- AARP.org: http://www.aarp.org/money/wise_consumer/investment_fraud/promissory_note_scams_too_good_to_be_true.html AARP describes Promissory Note Fraud and gives red flags to avoid becoming a victim.