Legal Definitions - Investor Protection Guide: Promissory Note Scam

A promissory note scam is a type of investment fraud where criminals trick individuals into lending money to what they claim are legitimate businesses, in exchange for a "promissory note." While a legitimate promissory note is a formal promise by a company to repay a loan with interest over a set period, in a scam, these notes are often worthless.

The fraudsters typically operate by creating fake companies or misrepresenting real ones. They promise investors unusually high returns with little to no risk, often claiming the notes are insured or guaranteed by reputable entities (which are usually fake or unlicensed). They frequently recruit intermediaries to sell these notes, sometimes without the intermediaries knowing the investment is fraudulent. The money collected from investors is then used to pay commissions to these sellers, with the bulk of the funds being stolen by the scammers. These scams frequently target individuals seeking safe, high-yield investments, such as retirees, who may be encouraged to liquidate other assets like life insurance policies to invest.

Here are some examples of how a promissory note scam might unfold:

• Example 1: The Fictitious Green Energy Venture

  An elderly couple receives a cold call from a salesperson promoting "sustainable energy investment notes." The salesperson claims to represent a cutting-edge company developing revolutionary wind turbine technology. They promise an annual return of 15%, significantly higher than market rates, and assure the couple that their investment is "100% guaranteed" by an obscure "International Renewable Energy Trust." Enticed by the promise of high returns and environmental impact, the couple invests a substantial portion of their retirement savings. After a few months of receiving small, sporadic "interest payments" (which are actually just money from new investors), all communication ceases, and they discover the company's listed address is a virtual office, the "trust" doesn't exist, and their money is gone.

  This illustrates a promissory note scam because: The "company" was fictitious, the promised returns were unrealistically high, and the "guarantee" was fraudulent. The initial payments were a classic tactic to build trust before the scammers absconded with the principal investment.

• Example 2: The "Exclusive" Real Estate Development

  A group of professionals is invited to an "exclusive investor briefing" for a luxury condominium development in a desirable coastal town. They are presented with glossy brochures, architectural renderings, and financial projections showing immense profits. The developers offer "secured promissory notes" promising a 10% annual return, claiming the notes are backed by the future value of the properties. Investors are told this is a unique opportunity to get in on the ground floor of a high-end project. After investing, they receive a few quarterly interest payments. However, construction never begins, the land remains undeveloped, and eventually, the "developers" disappear. The investors later learn that the company never actually owned the land and was merely a shell entity created to solicit funds.

  This illustrates a promissory note scam because: The promissory notes were issued by a fraudulent entity for a non-existent project. The high returns were a lure, and the "security" of the notes was entirely fabricated, leading to the investors losing their capital.

• Example 3: The "Local Business Expansion" Scheme

  A respected member of a small community, known for their financial acumen, is approached by a charismatic individual seeking capital for a supposed expansion of a local, well-known bakery. The individual offers promissory notes promising an 8% return, emphasizing that it's a way to "invest in the community" and support local jobs. The notes are presented as a safer alternative to the stock market, with a fixed return. Many community members, trusting the respected individual's endorsement, invest their savings. In reality, the bakery owner is deeply in debt and uses the invested money to pay off personal creditors and maintain a lavish lifestyle, not for business expansion. The bakery eventually declares bankruptcy, and the promissory notes become worthless, leaving the community investors with significant losses.

  This illustrates a promissory note scam because: The promissory notes were used to solicit funds under false pretenses, misrepresenting the true financial health and intentions of the business. The promise of a fixed, high return was a deceptive tactic, and the funds were misappropriated, resulting in investor fraud.