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Buys and Sells of Promissory Notes a Consequence of Downturned Real Estate Market

By Jim Hamilton

One consequence of the downturn in the residential real estate market that is taking place in Missouri among other states is the escalation of offers and sales of promissory notes by promoters to investors. These entrepreneurs are: (1) asking investors to invest in an individual property in exchange for a promissory note secured by a deed of trust in the property; (2) buying a promissory note secured by a mortgage and then selling the note to a third party; (3) acting as an intermediary between people attempting to buy or sell a promissory note; or (4) investing in a company that itself invests in real estate or in a promissory note secured by a mortgage.
While the Missouri Securities Division says that these transactions are not inherently unlawful, the entrepreneurs may be engaging in them without realizing that promissory notes are "securities" that must either be registered under the Missouri Securities Act or qualify for a state exemption from registration. Furthermore, even if an exemption applies the offeror must disclose to potential investors all information that a reasonable investor would want to know. And finally, that persons who offer or sell unregistered promissory notes that do not qualify for exemption subject themselves to civil and criminal penalties under the Act.

Full post as published by Jim Hamilton's World of Securities Regulation on June 11, 2008 (boomark / email).