Definition of ‘Note’ in Colorado Securities Act Limited

(Originally published March 17, 2016) by Paul L. Vorndran

The Colorado Court of Appeals reversed a criminal conviction for securities fraud pursuant to C.R.S. § 11-51-501(1)(b) finding the trial court erred in refusing to give a proffered instruction that not all promissory notes are securities for purposes of the Colorado Securities Act (CSA).  In People v. Mendenhall, 363 P.3d 758 (2015), the court examined an instruction defining ‘security’ for purposes of the CSA which stated simply that the term “security means any note.”  Relying upon Reves v. Ernst & Young, 110 S.Ct. 945 (1990), the Colorado Court of Appeals concluded that the term “any note,” included in the definition of security under both the CSA and federal Securities Exchange Act of 1934, should not be interpreted to mean literally ‘any note’ because not all notes are securities.  Mendenhall, 363 P.3d at 768, Reves 110 S.Ct. 945.  Instead, the term ‘note’ under the CSA must be interpreted under the so-called “family resemblance” test articulated in Reves and the four factors articulated therein.  Although Mendenhall was a criminal prosecution, it nevertheless amounts to an interpretation of the CSA.  It remains to be seen what impact Mendenhall will have on the Colorado Securities Commissioner’s decisions in bringing civil enforcement or cease and desist proceedings involving promissory notes.  A copy of Mendenhall can be found here.

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