Promissory Notes

A promissory note is, as the name implies, a contract whereby the borrower – usually a business- promises to repay the lender at a specific time in the future. Sometimes the contract calls for the payment of periodic interest; oftentimes the interest is paid upon maturity, along with principal.

Promissory notes with maturities longer than nine months are generally considered to be securities, and as a result they must be registered for sale, or exempt from registration. Usually this entails a filing with either the SEC or with a state securities regulator.

In addition strict rules govern who can sell the promissory notes; generally, they can be sold only by employees of the business, and only to people with whom an existing relationship exists. These restrictions are why these types of investments are rarely sold through traditional brokerage firms.

Nevertheless, it is not uncommon for registered representatives to engage in “outside business activities” by promoting promissory note investments to their clients. These “side deals” are rarely approved by the firm, unbeknownst to the investor. As with other illiquid investments that aren’t priced in a public marketplace, promissory note investments entail significant risks.

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