From Simmons Inv., Inc. v. Conversational Computing Corp., 2011 U.S. Dist. LEXIS 15962 (D. Kan. Feb. 17, 2011):

[T]he Court finds that Plaintiff has adequately alleged that the notes in question are securities. The Securities Exchange Act of 1934 define the term "security" to include "any note." [15 U.S.C. § 78c(a)(10)] However, in Reves v. Ernest & Young [494 U.S. 56 (1990)], the Supreme Court did not interpret the Act to include every note, rather, it stated that whether a note is a security hinges upon the application of what it called the family resemblance test. Under this test, every note is presumed to be a security, irrespective of when the note matures. This presumption can be overcome, though, under either step of a two-tiered analysis. During the first step, courts are to compare the note in question to the several types of notes that the Supreme Court has specifically stated are not securities, which are: notes delivered in consumer financing, notes secured by a mortgage on a home, short-term notes secured by a lien on a small business or some of its assets, notes evidencing a character loan to a bank customer, short-term notes secured by an assignment of accounts receivable, notes which simply formalize an open-account debt incurred in the ordinary course of business, and notes evidencing loans by commercial banks for current operations. When making this comparison, courts are to consider the following four factors: (1) the parties motivations for entering into the transaction; (2) the plan of distribution of the instrument; (3) the reasonable expectations of the investing public; and (4) whether some factor such as the existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering the application of the Act unnecessary. If the court does not find that a strong resemblance exists between the note in question and the notes the Supreme Court has identified as not being securities, the court then moves on to step two, which is deciding whether a new category of notes should be added to the list.

Tellingly, Defendants have not argued that the notes in question are not securities under the aforementioned test. Even if they had, though, the Court would still find that Plaintiff's notes do not strongly resemble the notes the Supreme Court has recognized as not being securities or are the type of note that should be added to that Supreme Court's list. The first factor weighs in favor of finding the notes to be a security, as the alleged purpose of selling the notes was to raise money for the Company's general use and Plaintiff's motivation in making the investment was to make a profit. The second factor does not weigh in favor of finding Plaintiff's notes to be a security because it does not appear based on Plaintiff's allegations that the notes were offered to a broad segment of the public. The third factor weighs in favor of finding that the notes are securities because Defendants advertised them as investments and the notes were convertible into common stock in the Company. The fourth factor is neutral because, while there is no federal regulation applicable to the notes, which courts have recognized as a factor weighing in favor of finding a note to be a security, one of the defendants personally guaranteed the amount owed, which reduces Plaintiff's risk and thus militates against a finding that the instruments in question are a security. Viewing these factors as a whole, the Court concludes that the notes at issue here do not strongly resemble a note declared by the Supreme Court to not be a security. Furthermore, the application of the four factor test leads the Court to the conclusion that these type of notes should not be added to the Supreme Court's list. As a consequence, the Court finds that Plaintiff has adequately alleged that the instruments in question are a security.

Defendants contend that irrespective of whether the notes in question pass the Reves test, the Court should find that they are not securities because their maturity dates at the time of issuance did not exceed nine months. In support of their position, Defendants cite to section 3(a)(10) of the Securities Exchange Act of 1934, which provides that any note that does not exceed nine months is excluded from the definition of a security. The Tenth Circuit has interpreted this provision to apply only to "prime quality negotiable commercial paper of a type not ordinarily purchased by the general public." [Holloway, 900 F.2d at 1489] Here, Simmons has not alleged that the notes in question are prime quality negotiable commercial paper and Defendants have not produced documentation that they are. Accordingly, Defendants' motion cannot be granted on the first ground advanced by Defendants.