Cohn, Rappaport & Segal

“Is Our Promissory Note A Security?”

“…In general, under the federal Securities Acts, promissory notes are defined as securities, but notes with a maturity of 9 months or less are not securities. …”

“…Reves Case

The US Supreme Court sets a rebuttable presumption that a note with a maturity over 9 months is a security unless it resembles a type of note that commonly is not considered a security. Reves v. Ernst & Young, 110 S. Ct. 945 (1990). The US Supreme Court in Reves recognizes that most notes are, in fact, not securities. The Court provides the following list of notes that are clearly not securities, irrespective of their maturity. Notes that fit into any of these categories are not securities.

· A note delivered in consumer financing.
· A note secured by a mortgage on a home.
· A note secured by a lien on a small business or some of its assets.
· A note relating to a “character” loan to a bank customer.
· A note which formalizes an open-account indebtedness incurred in the ordinary course of business.
· Short-term notes secured by an assignment of accounts receivables.
· Notes given in connection with loans by a commercial bank to a business for current operations.