WHAT IS A SECURITY

After reviewing problems that the Supreme Court opinions on the defini tion of ''security'' have addressed and have caused, this Article sugg ests revising the Court's current tests. The Court's first stage of de finition cases dealt with atypical investment schemes covered under th e rubric ''investment contract.'' In its first two Cases, the Court fi rst ignored, then altered the SEC's proposed test, making it under-inc lusive and thereby inviting promoters to try to escape securities law coverage either by giving the investor a nominal role in the enterpris e or by targeting investors one at a time. For investment contracts, t his Article suggests a return to the SEC's original test, which reache d investment schemes if they involved either multiple investors (hence 'horizontal community'') relying predominantly on the efforts of the promoter or one or more investors relying solely on such efforts. In i ts second phase, the Court addressed arrangements whose names were the same as well-recognized securities such as stocks and bonds (''enumer ated categories'') but whose economic realities were not those of a se curity. The Court created certain judicial approaches for excluding su ch arrangements from coverage, usually by emphasizing legislative purp ose over statutory language. Although well-intended, the Court's attem pt to forestall over-inclusive coverage threatened under-inclusiveness and unwarranted judicial activism. The Court redressed this threat in its third phase, in which it created rebuttable presumptions for cove rage-initially for stock, then for notes-thereby following the statuto ry language more literally and more readily finding enumerated categor ies to be securities. This Article argues that this approach has been appropriate for stock but inappropriate for notes. The presumption tha t a stock is a security is correct because owning rights to the residu al returns of a business enterprise and thus participating proportiona lly in its risks and returns is the paradigm of an investment. Moreove r, the presumption for coverage should be extended, with certain excep tions, to all equity arrangments. The presumption that notes are secur ities, however, is over-inclusive and threatens various economic dislo cation. Only investment notes should be treated as securities; consume r and commercial notes should not. Accordingly, this Article proposes that the two opposing poles of the spectrum between investment and com mercial notes be identified and then governed by two opposing presumpt ions, one for and one against coverage. Thus, for example, notes sold to the public through investment banks constitute the paradigm of the investment note and should be presumed a security. Notes given to comm ercial banks by borrowers in ordinary commercial banking activities an d notes given in consumer transactions, however, should be presumed no t to be securities. Between the two extremes, no presumption should go vern, and securities law coverage should depend on notes being closer to an investment context than to a commercial or consumer context.