Reves v. Ernst & Young

Supreme Court of the United States · 1990 · Corporations

494 U.S. 56 (1990)

Updated August 1, 2026

Corporationsnotes as securitiesfamily resemblancesecuritynoteinvestmentcommercial papereconomic reality

Facts

The Farmers Cooperative of Arkansas and Oklahoma sold uncollateralized, uninsured demand notes to raise money for its general business operations. The notes paid a variable interest rate adjusted monthly to remain above rates paid by local financial institutions, and the Co-Op marketed them to members and nonmembers as an "Investment Program." Advertisements described the notes as investments and emphasized their safety, and more than 1,600 people held about $10 million in notes when the Co-Op filed for bankruptcy in 1984. The noteholders alleged that Arthur Young's audit had inflated the Co-Op's assets and net worth, and that they would not have bought the notes had the Co-Op's insolvency been apparent.

Issue

Whether the Co-Op's demand notes were "securities" within the meaning of § 3(a)(10) of the Securities Exchange Act of 1934. Also, whether the notes fell within the statutory exclusion for notes with a maturity at issuance of not exceeding nine months.

Rule

A note is presumed to be a security under the Securities Acts. That presumption may be rebutted only by showing that the note bears a strong family resemblance to a recognized category of non-security notes, assessed by four factors: (1) the motivations of seller and buyer, (2) the plan of distribution, (3) the reasonable expectations of the investing public, and (4) whether another regulatory scheme or risk-reducing factor makes application of the Securities Acts unnecessary. If the note does not sufficiently resemble an existing category, courts decide whether to add a new category by examining the same four factors.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Tulsa, Oklahoma, Prairie Horizon Milling issued one-year notes to the public through mailers stating that the funds would be used to expand the company's processing facilities and that investors would receive a fixed 8% return. Dana Ortiz purchased a note primarily to earn interest, while the company used the proceeds for general corporate expansion.

Under the governing test, which factor most strongly supports treating the note as a security?

Explanation. A note is presumed to be a security. One core family-resemblance factor is the motivations of seller and buyer. When the seller raises money for the general use of a business enterprise or substantial investments, and the buyer is motivated by profit in the form of interest, the instrument is likely a security. The absence of voting rights or the issuer's private status does not defeat that conclusion.