Reves v. Ernst & Young, 494 U.S. 56 (1990), Supreme Court of the United States
Reves v. Ernst & Young is a cornerstone in securities law because it answers a deceptively simple but recurring question: when is a "note" a "security"?
Are the uncollateralized, widely distributed demand notes issued by the Co-Op "securities" within the meaning of the Securities Exchange Act of 1934?
Because the Exchange Act defines "security" to include "any note," there is a rebuttable presumption that every note is a security. That presumption may be overcome only if the note bears a strong resemblance—determined by reference to four factors—to a judicially recognized category of instruments that are not securities, or to a new category that is similar in kind. The four factors are: (1) the motivations of the buyer and seller (investment/profit-seeking versus commercial or consumer financing); (2) the plan of distribution (common trading for investment/speculation versus a limited, restricted context); (3) the reasonable expectations of the investing public; and (4) the existence of another regulatory scheme or risk-reducing factor that significantly diminishes the risks of the instrument and makes application of the federal securities laws unnecessary. Short-term notes with a maturity not exceeding nine months are separately excluded from the Exchange Act's definition by statute.
Yes. The Co-Op's demand notes are "securities" under the Exchange Act. The presumption that a note is a security was not rebutted under the family resemblance test.
Reves is the definitive Supreme Court articulation of the "family resemblance" test for determining when a note is a security. It provides a predictable, policy-aware framework that courts have applied across both the 1933 and 1934 Acts. The case guides issuers, auditors, counsel, and investors in structuring and evaluating note offerings and remains central to assessing the reach of Rule 10b-5 and other antifraud provisions. For law students, Reves complements the Howey test for investment contracts by supplying the parallel doctrine for notes, illustrating how courts balance statutory text, investor expectations, and regulatory objectives to cabin federal securities jurisdiction. (Practitioners should also remember that a separate case with the same caption in 1993 established the "operation-or-management" test for civil RICO liability, a different but commonly cited doctrine.)