Promissory notes can appear to be safe, lucrative investments. But many investors have been left with only broken promises. Informed investors recognize that when an investment sounds too good to be true, it usually is.

A promissory note is simply a form of debt - like a loan or an IOU - that a company may issue to raise money.  An investor typically agrees to loan money to a company in exchange for the company's promise that it will pay back the amount, plus interest, over a specific time period.

Some notes are issued on behalf of companies that don’t even exist. Investors often get official-looking promissory note certificates complete with legal-sounding language and gold embossed seals. Insurance agents may tell investors the notes are a safe investment since they are purportedly bonded or guaranteed by insurance companies. However, most of the surety companies guaranteeing the notes are unlicensed, are located offshore and are not able to financially stand behind the promised guarantees. As an added risk, the companies who choose such means of financing invariably find it extremely difficult to pay investors their promised returns within the specified short timeframes.

Potential investors can be thrown off-guard since they often know and may have a long-standing, trusted relationship with the insurance agents selling the notes. In addition, out-of-state investment advisers may also sell promissory notes, and some are promoted over the Internet.

What’s the attraction of promissory notes?  Many of the victims are elderly investors who don’t want exposure to the risk of the general securities market and aren’t interested in traditional insurance products. They may, however, be attracted to "promissory notes" because they seem to offer safety along with a higher-than-market rate of return.

According to the sales pitch, the promissory notes are from supposedly "well-established" companies who need capital to expand their businesses. Instead of borrowing money from a traditional lender, they instead offer investors an opportunity to purchase such "notes," typically with a maturity of nine months and an annual interest rate of up to 20%. Agents may urge clients to "cash-in" their life insurance policies and "roll" them into these notes.

Where does the money go?  The promoters may use a portion of the money raised from investors to pay agents their commissions or they may use a "Ponzi scheme" to pay Peter with new money from Paul.  Typically, according to regulators, they abscond with the rest, squandering it on personal expenses or high-flying life styles.