Discuss when a promissory note will be considered a security including a detailed discussion of the family resemblance test

Answer 1

The U.S. Supreme Court also set forth the family resemblance test for determining which types of notes are securities. Under that test, a promissory note is initially presumed to be a security based upon the literal language of the securities acts. That presumption may be rebutted, however, by a showing that the note bears a strong resemblance (in terms of four specific factors) to an enumerated category of instruments commonly held not to constitute securities such as notes delivered in connection with consumer financing, notes secured by a home mortgage, and short-term notes secured by accounts receivable. The four specific factors used in evaluating an instrument are:

1 . The motivations that would prompt a reasonable seller and buyer to enter into the transaction.
2 . The plan of distribution of the instrument.
3 . The reasonable expectations of the investing public.
4 . Whether some factor, such as the existence of another regulatory scheme, significantly reduces the risk of the instrument, thereby rendering application of the federal securities laws unnecessary.