Securities Advisory Releases
Advisory Release AR-08-01:
Securities Laws Implications for Transactions Featuring Promissory Notes and Real Estate
Recently, the Securities Division has received numerous inquires regarding the buying and selling of promissory notes underlying residential mortgages. The number of inquiries and the types of questions being asked suggest an increase in use of promissory notes as an investment device. Individuals may be participating in these transactions without being aware of the applicable laws.
The types of transactions proposed have varied widely, but all involve promissory notes in some fashion. Some of these transactions include:
- asking investors to make an investment in an individual property in exchange for a promissory note secured by a deed of trust in the property. The promoters would then engage in activities intended to result in the sale or lease of the property, hoping to earn the profit promised to the investors;
- buying a promissory note secured by a mortgage and then selling the note to a third party;
- acting as an intermediary between people seeking to buy or sell a promissory note;
- investing in a company which itself invests in real estate or in promissory notes secured by a mortgage.
All the above transactions involve a promissory note, and there is nothing to suggest that these transactions are inherently unlawful. However, there is a concern that some entrepreneurs, with little previous experience in real estate and/or securities, are taking advantage of the recent downturn in the housing market by buying the promissory notes underlying some mortgages without being aware that Missouri law defines a “security” to include a promissory note.
Consequently, the above transactions may be regulated by Missouri’s securities laws. For instance, a person cannot offer or sell a security in Missouri unless the security is registered under the laws or exempt from that registration. To make the transaction legal, a person offering a security must either register the security or offer it in a way that qualifies for the exemption. A person who violates the securities laws—such as by offering a security when it is not registered or exempt—may face thousands of dollars in civil penalties, a private lawsuit, or possibly criminal penalties.
Also, a transaction that involves a security is subject to certain disclosure requirements, even if the securities are exempt from registration. A person offering a security—such as a promissory note—must take care to disclose to the potential investor all information that a reasonable investor would want to know. Failure to do so may be fraud under the securities laws.
Those individuals offering or selling securities in the State of Missouri should ensure that they are doing so in compliance with the Missouri Securities Act of 2003. The Missouri Bar Association (573) 636-3635 can provide an attorney referral. If you are considering purchasing a promissory note, please be aware of your rights under the laws.
If you have any questions, you may call the Securities Division at (573) 751-4136.