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Here's how you can avoid the costly mistake of investing in a sham promissory note: These Would Be Considered a Violation Of Promissory Note Law

Bear in mind that legitimate corporate promissory notes are not usually sold to the general public. Instead, they tend to be sold privately to sophisticated buyers who do their own "due diligence" or research on the company. If someone calls you up or knocks on your door trying to sell you a promissory note, chances are you're dealing with a scam.

Find out whether the investment is registered with the SEC or your state securities regulator – or whether it's exempt from registration. Most legitimate promissory notes can easily be verified by checking the SEC's EDGAR database or by calling your state securities regulator, which you can find at the website of the North American Securities Administrators Association. If the promissory note is not registered, you'll have to do your own thorough investigation to confirm whether the company has the ability to pay its debt.

Be skeptical if the seller tells you that the promissory note is not a security. The types of promissory notes involved in promissory note scams usually are securities and must be registered with either the SEC or your state securities regulator – or they must meet an exemption.

Make sure the seller is properly licensed. Insurance agents can't sell securities – including promissory notes – without a securities license. Call your state securities regulator, and ask whether the person or firm is licensed to sell securities in your state and whether they have a record of complaints or fraud. You can also get this information by calling NASD's public disclosure hotline at (800) 289-9999 or by visiting their website.

Beware of promises of "risk free" returns. These claims are usually the bait con artists use to lure their victims. Always remember that if it sounds too good to be true, it probably is.

Watch out for promissory notes that are supposedly "insured" or "guaranteed," especially if a foreign insurance company is involved. Be sure to call your state insurance commissioner to find out whether the foreign insurance company can legally do business in the United States.

Compare the rate of return on the promissory note with current market rates for similar fixed-rate investments, long-term Treasury bonds, or FDIC-insured certificates of deposit. If the seller promises an above-market rate on a short-term note, proceed with caution.

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