We warn often that promissory notes are dangerous, and that you must do a thorough due diligence investigation before investing in one. The SEC has recently filed yet another enforcement action concerning promissory notes. According to the SEC’s press release:
The Securities and Exchange Commission today charged two non-U.S. companies — Venulum Ltd. (a British Virgin Islands company) and Venulum Inc. (a Canadian company) — and their owner and chairman Giles Cadman (a resident of the United Kingdom), with registration violations in connection with unregistered offers and sales of promissory notes and interests in fine wines. The Commission’s suit, filed in Dallas federal court, alleges that, beginning in 2002, Venulum made unsolicited calls to American investors, primarily dentists, to solicit investments in interests in trading in fine wines to be managed by Venulum. Venulum’s solicitation highlighted its purported expertise in selecting, sourcing, storing and marketing fine wines for the benefit of investors. Then, starting in 2010, Venulum solicited 94 of its wine investors to purchase high-interest promissory notes. Neither of the offerings was registered with the Commission.
Who knew that dentists are such suckers for fine wines? Truly, it wasn’t dentists’ reputation for loving wine that attracted these defendants, but a reputation for disposable income. Doctors face the same problem. Securities salesmen often cold call from lists of professionals.
A due diligence investigation in this case would have started, and could have ended, with finding out whether the notes were registered. Contrary to what promissory note salesmen tell you, the vast majority of promissory notes sold as investments are required to be registered. And, while it is always better to avoid buying an investment that should have been registered but was not, if you find yourself having bought one, seek competent legal counsel right away. Most state securities laws entitle you to recover the purchase price in such cases, minus whatever the note is worth. But, you have to act quickly.