Under federal securities law, a loan can be a security. Any promissory note starts out presumed to be one, and the lender or borrower arguing otherwise has to prove it. In practice, most ordinary loans fall into recognized categories that courts have already excluded, so the question of whether a loan is a security matters most for private lending arrangements that look and feel like investments.
Why Every Note Starts as a Security
The Securities Act of 1933 defines “security” to include stocks, bonds, investment contracts, and — explicitly — any “note.”1GovInfo. 15 U.S. Code 77b – Definitions; Promotion of Efficiency, Competition, and Capital Formation Because the statute names notes alongside stocks, the Supreme Court in Reves v. Ernst & Young, 494 U.S. 56 (1990), held that every note is presumed to be a security under both the 1933 Act and the Securities Exchange Act of 1934. Whoever claims a note is not a security carries the burden of showing it.2Justia Law. Reves v. Ernst and Young, 494 U.S. 56 (1990)
That sounds sweeping, and it is. But the same case also gave the exit ramp most loans use.
Loans That Are Not Securities
The Reves Court adopted a list of note types that courts had already recognized as sitting outside securities law. If your loan fits one of these descriptions, the analysis is over and the note is not a security:
- Consumer financing notes — loans to buy consumer goods like a car or an appliance.
- Home mortgage notes — loans secured by residential property.
- Short-term notes secured by a lien on a small business or its assets.
- Character loans — loans a bank extends based on the borrower’s creditworthiness rather than a specific asset.
- Short-term notes backed by an assignment of accounts receivable.
- Open-account debts formalized in the ordinary course of business.
- Commercial bank loans made to finance a borrower’s current operations.
Most everyday lending sits inside this list. A mortgage on your house is not a security. A car loan is not a security. A bank line of credit funding a company’s payroll is not a security. If your loan is one of these, you can stop here.2Justia Law. Reves v. Ernst and Young, 494 U.S. 56 (1990)
How Courts Decide the Rest
If a note does not resemble anything on that list, the court applies four factors to decide whether to add a new exception or treat the note as a security.2Justia Law. Reves v. Ernst and Young, 494 U.S. 56 (1990) The factors work together, and no single one controls.
Why the parties entered the transaction. A note used to raise general capital for a business looks like an investment. A note used to finance a specific purchase or plug a short-term cash gap looks like a loan. On the lender’s side, someone chasing interest, profit-sharing, or appreciation is behaving like an investor; someone extending trade credit is not.
Who can buy the note. A privately negotiated loan between a bank and a corporate borrower does not raise the concerns that a note marketed to hundreds of individuals does. The broader the pool of potential holders, the more the arrangement resembles a public offering. The note does not have to trade on an exchange for this factor to cut against the issuer.
How a reasonable person would view it. If marketing materials talk about returns, yields, or growth potential, courts treat the note as an investment regardless of what the document is titled. Calling something a “promissory note” does not save an offering that is pitched like one.
Whether another regulatory scheme already protects the lender. If federal banking supervision, ERISA, or meaningful collateral already covers the transaction, courts are less likely to layer securities regulation on top. A loan secured by real property or other identifiable assets gives the lender protection that reduces the need for securities-style disclosure.
A Note on the Howey Test
Federal law uses a different test for arrangements that do not look like debt on their face. Under SEC v. W.J. Howey Co., 328 U.S. 293 (1946), an “investment contract” exists where there is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) derived from the efforts of others.3Library of Congress. SEC v. W.J. Howey Co., 328 U.S. 293 (1946) Howey comes up with novel arrangements like tokens, syndications, and franchise schemes. If you are looking at a document titled “promissory note” or “loan agreement,” the Reves family resemblance test is the one that applies, and the starting presumption runs against you rather than with you.
What Changes If Your Loan Is a Security
Registration or an Exemption
An issuer whose note is a security must either register the offering with the SEC or fit within an exemption.4Office of the Law Revision Counsel. 15 U.S.C. 78l – Registration Requirements for Securities Full registration is expensive, so most private note offerings rely on Regulation D. Under Rule 506(b), the issuer cannot use general advertising and can sell to no more than 35 non-accredited investors in any 90-day period. Under Rule 506(c), the issuer can advertise, but every purchaser must be an accredited investor and the issuer must take reasonable steps to verify that status. Both routes require filing a Form D notice with the SEC within 15 days of the first sale, at no filing fee, and most states require a separate notice filing with fees that vary by state.5SEC. Exempt Offerings
Criminal Exposure
Willfully selling an unregistered security or lying in a registration filing is a federal crime. Under the 1933 Act, an individual faces up to a $10,000 fine, five years in prison, or both.6Office of the Law Revision Counsel. 15 U.S. Code 77x – Penalties Under the 1934 Act, an individual faces up to $5,000,000 in fines, 20 years in prison, or both, and an organization faces up to $25,000,000.7Office of the Law Revision Counsel. 15 U.S. Code 78ff – Penalties
Civil Liability
Section 12(a)(1) of the Securities Act lets the buyer of an unregistered security sue to rescind the purchase. If you sold the note, you have to return the purchase price plus interest, minus any income the buyer already received. If the buyer no longer holds the note, the buyer can recover damages instead.8Office of the Law Revision Counsel. 15 U.S. Code 77l – Civil Liabilities Arising in Connection With Prospectuses and Communications The SEC can separately seek disgorgement of net profits, which under Liu v. SEC, 591 U.S. 71 (2020), must generally be returned to harmed investors.9Supreme Court of the United States. Liu v. SEC, 591 U.S. 71 (2020)
Resale Restrictions
A note acquired through a private placement is a “restricted security” and cannot be freely resold. SEC Rule 144 sets the wait: at least six months if the issuer files regular reports with the SEC, and at least one year if it does not. The clock does not start until you have paid the full purchase price. The manner-of-sale restrictions that apply to equity resales under Rule 144 do not apply to debt, so noteholders have somewhat more flexibility when they eventually sell.10eCFR. 17 CFR 230.144 – Persons Deemed Not To Be Engaged in a Distribution and Therefore Not Underwriters
The practical takeaway is narrower than the presumption suggests. Your mortgage, your car loan, your business line of credit — none of those are securities. But a note issued to raise capital, marketed for its yield, and sold to a wide audience is a security by default, and treating it as an ordinary loan is where issuers get into trouble.