What laws regulate buying and selling business promissory notes?

Full question:

Are there any state or federal laws that regulate the buying and selling of promissory notes linked to businesses?

• Category: Debts and Credit
• Subcategory: Promissory Notes
• Date: 04/07/2025
• State: National

Answer:

Initially, securities were regulated at the state level. However, following the 1929 Stock Market crash, Congress enacted federal laws to regulate the sale of securities. The Securities Act of 1933 governs the initial sale of securities, while the Securities Act of 1934 regulates secondary trading on stock markets. The 1933 Act does not define a security explicitly but lists around twenty items that may qualify, including stocks, bonds, and certain business interests.

A key case, SEC v. Howey Co., defined a security as an investment in a common enterprise where profits arise from the efforts of others. Any investment contract that provides evidence of debt or business participation rights can be considered a security under this Act. However, the U.S. Supreme Court has excluded pension plans from this definition when employees do not contribute.

Some securities are exempt from the registration and filing requirements of the Act. For instance, commercial paper (like promissory notes) with a maturity of less than nine months is exempt. Other exemptions include bonds issued by government entities, securities from banks and charitable organizations, insurance policies, and annuities.

Close corporations often utilize exempt transactions, such as intrastate offerings. To qualify for this exemption, both the investors and the issuer must be state residents. Additionally, the issuer must meet specific criteria: at least eighty percent of its assets and income must come from within the state, and eighty percent of the proceeds from the sale must be used for operations within the state. Furthermore, for nine months post-issuance, the stock can only be sold to state residents.