I’m sure you have all heard, and probably used the expression: if it looks like a duck, walks like a duck and quacks like a duck, it probably is a duck. That might be an OK way to identify a duck but when it comes to securities law I would like a little more definitiveness given the draconian penalties that violations of such laws can engender. The applicability of such laws to specific transactions tends to hinge on whether or not an instrument qualifies as a “security.” If the transaction involves the exchange of equity (such as common stock, convertible preferred or convertible notes) for consideration in all likelihood the SEC will call it a duck, I mean a security. In which case, the transaction must be registered or must fall under one of the exceptions to securities laws such as Rules 504 and 506 of Regulation D. However, ambiguity arises when the instrument is a promissory note. In general promissory notes are defined as securities, except that a promissory note with a maturity of nine months or less is excluded from the definition. Here’s the rub, that doesn’t mean a promissory note with a maturity of over nine months is necessarily a “security.” The Supreme Court known for its definitiveness in the area of pornography via the: I don’t know how to define it, but I know it when I see it standard, as promulgate by Justice Potter Stewart, also hedges on whether a promissory note with a maturity of nine months or more is a duck or a goose. The Court has established a rebuttable presumption that such a note 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). In an attempt to add some clarity to its opinion, the Court provides a list of categories delineating transactions in which a note falling into any of such categories, regardless of its time to maturity, would not be considered a security. For notes not covered by any of those categories the Court provides a number of factors to consider in determining if a note is a security or not, none of which I find add a great deal of definitiveness to the question. So bottom line, given the ambiguities and significance of the consequences for violating the securities laws, when in doubt hire a good securities attorney.