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A promissory note is that which gives details of a promised agreement between two parties. The maker usually issues it in the event of repayment of a loan or any other debt to the payee. It includes the principal amount, rate of interest, if any, the maturity date, and the provisions in case of default. It differs from an IOU as it is not merely acknowledgment of the existence of debt, but an evidence of the responsibility of paying it off.

Important use of these notes is in the sale of businesses. As commercial paper, they can be issued and transferred for capitalization of corporate finances. It is a negotiable instrument under Article 3 of Uniform Commercial Code in the and is often used in combination with mortgages in financing of real estate transactions.

However, promissory notes are often used in risky investments, and have been involved in scams. Unlicensed individuals, like independent insurance agents, sell fraudulent securities by making interest payments to groups of other promissory note investors. In one such scam in the , investors from at least 14 states lost close to $30 million. In separate cases in Arizona, three insurance agents were sentenced for scamming millions of dollars through sales of bogus investments and promissory notes.

In another case, James Hoyle McCarn was sentenced in federal court on one count of Conspiracy to Commit Securities & Mail Fraud and one count of Securities Fraud for the sale of 9-month promissory notes from 1995-2002. The renewal of these 9-month notes amounts to new sales, which cannot be permissible. In a similar case, John Myers was indicted for scamming 10 investors off $170,000.00.

In the United State, state and federal securities regulators target nine-month note programs being offered by sham and/or start-up companies. These notes can show greater revenue or more assets than which actually exist, and sometimes facilitate fraud or empty exchanges.

Hence, writing and signing of promissory notes is beneficial in keeping records of debt payments, and for purposes of taxing. However, they can also be misused for duping people off their money.

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