Opinion ID: 184730
Heading Depth: 3
Heading Rank: 3

Heading: The Third Reves Factor--Expectations

Text: 30 The Supreme Court described the third factor as follows: 31 Third, we examine the reasonable expectations of the investing public: The Court will consider instruments to be securities on the basis of such public expectations, even where an economic analysis of the circumstances of the particular transaction might suggest that the instruments are not securities as used in that transaction. 32 Reves, 494 U.S. at 66, 110 S.Ct. 945. 33 Whether notes are reasonably perceived as securities generally turns on whether they are reasonably viewed by purchasers as investments. See id. at 68-69, 110 S.Ct. 945; Pollack, 27 F.3d at 814; SEC v. R.G. Reynolds Enters., Inc., 952 F.2d 1125, 1131 (9th Cir.1991). When a note seller calls a note an investment, in the absence of contrary indications it would be reasonable for a prospective purchaser to take the [offeror] at its word. Reves, 494 U.S. at 69, 110 S.Ct. 945. See also R.G. Reynolds Enters., Inc., 952 F.2d at 1131. Conversely, when note purchasers are expressly put on notice that a note is not an investment, it is usually reasonable to conclude that the investing public would not expect the notes to be securities. See Banco Espanol de Credito, 973 F.2d at 55-56. Here, there is no indication that Stoiber called the notes investments. Although of questionable value due to their conclusory character, affidavits submitted by the customers stated that the notes were not considered to be investments. The limited evidence thus suggests that Stoiber's investing public did not reasonably view the notes as securities. 34 This admission does not, however, add much to the inquiry into whether the promissory notes are securities. The Supreme Court itself described this factor as a one-way ratchet. See Reves, 494 U.S. at 66, 110 S.Ct. 945. It allows notes that would not be deemed securities under a balancing of the other three factors nonetheless to be treated as securities if the public has been led to believe they are. It does not, however, allow notes which under the other factors would be deemed securities to escape the reach of regulatory laws. In this case, then, the third Reves factor is basically a wash. 35