Convertible Note Fraud: What Issuers Need to Know

Updated: Nov 11, 2021

Convertible Note Fraud Overview

A convertible note is a written promise made by a public company issuer to pay another party at some point in the future. The defining characteristic of a convertible note is the lender forces repayment using an issuers stock by converting the debt into shares of stock based on a percentage discount as to the stocks trading price at the time of conversion.

If you have issued a convertible note in the past, you have likely signed a promissory note.

Public company’s issue convertible notes to raise money. Unfortunately, in recent years, convertible promissory notes have become a conduit for fraud (ie. convertible note fraud).

Convertible Notes are Securities

Typically, when convertible notes are offered to the public, investors are not informed that the promissory note is a ‘security’. Yet, under American law, specifically the Securities Exchange Act of 1934, many promissory notes qualify as securities.

This was further clarified by the Supreme Court of the United States in the 1990 case of Reves v. Ernst & Young. In that case, the court noted that all corporate-based notes that have a maturity time in excess of nine months are presumed to be securities. Yet, despite being securities, many convertible promissory notes are unlawfully offered by un-registered funding groups and individuals, outside industry regulations.

Who Commits Convertible Note Fraud?

In most cases dealing with small publicly traded companies, the fraudsters solicit sales of illegitimate convertible promissory notes directly from issuers. Very often, despite promissory notes qualifying as securities under the law, they illegally sell outside of any member brokerage firms. Individual licensed investment bankers, or unlicensed funders are often in the mix, because these professionals have ongoing relationships with small public companies.

Is Your Company a Victim of Convertible Note Fraud?

If you have already been the victim of convertible note fraud, you deserve fair compensation for your losses. At The Basile Law Firm P.C. we have extensive experience handling convertible note litigation fraud cases.

Eric J. Benzenberg, Esq. is senior securities litigation attorney at The Basile Law Firm P.C. To learn more about what we can do for you, please call us today at 516.455.1500 ext. 112 to request your free initial consultation. With offices in New York, Texas and Florida, we serve wronged public companies nationwide. You can reach Mr. Benzenberg at

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