NASAA: Promissory notes top investor complaints

State securities regulator group says investors also should beware real estate, Ponzi schemes

Dec 13, 2017 @ 11:12 am

By InvestmentNews

Promissory notes are the most frequently identified source of investor complaints or investigations, cited by 74% of state securities regulators in a survey conducted by the North American Securities Administrators Association, which released the announcement on Wednesday.

Securities regulators from 50 U.S. jurisdictions answered the survey, which was conducted in the spring and summer of 2017.

"In today's ongoing environment of low interest rates, the lure of high-interest-bearing promissory notes continues to tempt investors, especially seniors and others living on a fixed income," said Joseph P. Borg, NASAA president and Alabama Securities Commission director.

(More: Borg puts cybersecurity, unpaid arbitration claims on NASAA agenda.)

NASAA said that legitimate promissory notes, used generally by companies to raise capital, are marketed and sold almost exclusively to sophisticated or corporate investors who can do the appropriate research on the issuer's creditworthiness. Promissory notes may require registration as securities with federal and state securities regulators.

Mr. Borg said that average investors should be wary of promissory note offers with a duration of nine months or less, which in some cases do not require registration. Short-term notes that seem to be exempt from securities registration have been the source of most of the frauds involving promissory notes identified by regulators.

According to NASAA's 2017 enforcement report, based on 2016 data, state securities regulators reported 138 formal enforcement actions involving promissory notes.

(More: SEC charges adviser in Dawn Bennett fraud case.)

Real estate investments and Ponzi or pyramid schemes were the second-most common source of complaints or investigations, flagged by 54% of state securities regulators. Oil and gas-related investments or interests were the third most common type of complaints or investigations, cited by 50% of regulators. Affinity fraud was noted by 28% of the regulators, and then variable annuity sales practices, cited by 26%.

Separately, NASAA's Enforcement Section pointed out three emerging threats that investors should beware in 2018: initial coin offerings (ICOs), cryptocurrency contracts for difference (CFD), and identity theft to deplete investment accounts, particularly among senior investors.


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