What's What in the Financial Services Industry

Promissory Note

Definition: a written promise to pay a sum of money to a specific person (purchaser) at a particular time in the future. Promissory notes differ from IOUs in that they contain a specific promise to pay, rather than simply acknowledging that a debt exists.

Example: a company may issue promissory notes stating that its investors will receive a rate of return on their investments in a set amount of time.

Regulated by: depending on certain characteristics, promissory notes can either be a security or a loan:  

Characteristics of a promissory note being a security
1. purchaser is intending to "invest" in the business
2. there is no pre-existing personal relationship between the parties
3. the money for the promissory note is given to a business, especially a business in the early stages of development.

*promissory notes defined as a security must be registered with the Indiana Securities Division

Characteristics of a promissory note being a loan
1. purchaser is intending to provide a loan
2. purchaser is a bank or other lending institution in the business of providing loans
3. there is a pre-existing personal relationship between the parties
4. money for the promissory note is provided to a person and is used for personal reasons and not to be used in a business

*promissory notes defined as a loan do not have to be registered

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