September 8, 2023

Second Circuit Rules that Syndicated Loans Are Not “Securities” Under State and Federal Law

On August 24, 2023, the U.S. Court of Appeals for the Second Circuit in Kirschner1 unanimously  held that notes evidencing syndicated loans2 do not plausibly qualify as “securities” covered by state and federal securities laws under Reves v. Ernst & Young, 494 U.S. 56 (1990).3 The decision reaffirms the long-held understanding by market participants that commercial loans are not securities for purposes of the securities laws.


In Kirschner, approximately seventy institutional investor groups, comprised of approximately 400 mutual funds, hedge funds, and other institutional investors (the “Investors”), purchased $1.775 billion in loans (“Notes”) of Millennium Laboratories LLC (“Millennium”) from the original lenders (the “Original Lenders”).4

Millennium filed for bankruptcy in 2015. The chapter 11 plan approved by the Bankruptcy Court created the Millennium Lender Claim Trust (the “Trust”) and authorized the Trust to pursue the Investors’ claims against Original Lenders.

In August 2017, Marc S. Kirschner (the “Trustee”), in his capacity as trustee, brought an action against the Original Lenders alleging violations of various state securities laws; negligent misrepresentation; breach of fiduciary duty; breach of contract; and breach of the implied covenant of good faith and fair dealing in connection with the sale of the Notes.5

In June 2019, the Original Lenders moved to dismiss the Trustee’s complaint. In May 2020, the District Court granted the Original Lenders’ motion to dismiss. It dismissed the state-law securities claims because it concluded that plaintiff failed to plead facts plausibly suggesting that the Notes are “securities” under Reves.6

Kirschner Decision

The Second Circuit affirmed the district court’s dismissal, concluding that the subject syndicated loan bore a “‘strong resemblance’ to one of the categories of ‘notes’ held not to be a security: “‘[L]oans issued by banks for commercial purposes.’”7 In reaching this conclusion, the Second Circuit applied the “family resemblance” test first articulated by the United States Supreme Court in Reves.

Under this test, which the Supreme Court applied to determine whether promissory notes are securities,8 there is “a presumption that every note is a security.”9 “[T]hat presumption may be rebutted only by a showing that the note displays a strong resemblance . . . to one of the enumerated categories of instrument” that are not securities.10

To determine whether the note in question displays a “strong family resemblance” to one of the types of notes that are not considered securities, Reves instructs that courts should consider the following four factors:

  1. the motivations that would prompt a reasonable seller and buyer to enter into the transaction;
  2. the plan of distribution of the instrument;
  3. the reasonable expectations of the investing public; and
  4. the existence of another regulatory scheme to reduce the risk of the instrument, thereby rendering application of the Securities Act unnecessary.11

In addition, if the note is not sufficiently similar to one of the types of notes that are not considered securities on the list, “the decision whether another category should be added is to be made by examining the same factors.”12

The Second Circuit found that the first factor—motivation of the parties—supported the Trustee’s claims that the Notes should be treated as securities because the Trustee adequately pled that the Original Lenders’ motivations were not commercial13 but investment14 oriented.15

However, the Second Circuit found that the remaining three factors—the plan of distribution, the reasonable expectations of the public and the presence of another regulatory scheme that reduces the investment risks —weighed against concluding that the Trustee plausibly pled that the Notes were securities. Specifically:

  • The plan of distribution factor weighed against the Notes being securities because the Notes were not offered and sold to a broad segment of the public.16 Indeed, the arrangers offered the Notes “only to sophisticated institutional entities”17 and the “restrictions on any assignment of the Notes rendered them unavailable to the general public.”18
  • The reasonable expectations of the public factor weighed against the Notes being securities because the “pleaded facts did not plausibly suggest that the lenders reasonably perceived the Notes as securities. Instead, … the sophisticated entities that purchased the Notes ‘were given ample notice that the [Notes] were . . . loans and not investments in a business enterprise.’”19 In reaching this conclusion, the Second Circuit found that, before purchasing the Notes, the Investors made certain certifications regarding their sophistication and experience in extending credit to entities similar to Millennium, independent investigation and appraisal of business, operations, property, financial and other condition and creditworthiness of Millennium, and regarding their own decision to make the investment.20
  • The presence of another regulatory scheme that reduces the investment risks factor weighed against the Notes being securities because the Notes were secured by collateral (and, thus, their purchase carried less risk) and federal regulators21 have issued specific policy guidance addressing syndicated loans (thereby providing some protection to consumers).22


The Kirschner decision, for now,23 preserves the market’s understanding that syndicated loans are not securities. The implications of this decision on market participants cannot be understated. A finding that syndicated loans are securities could upend the approximately $1.5 trillion dollar broadly syndicated loan market by, among other things, driving up compliance costs for borrowers under federal and state securities laws and increasing borrowing costs by limiting the market for lenders because certain investors can only invest in loans and not securities—not to mention, otherwise upsetting decades of market expectations and practice.24 Indeed, the Second Circuit’s affirmance has already been declared by some in the industry as “an extremely positive development” and “a great – and critical – result for the leveraged loan market.”25


[1] Kirschner v. JP Morgan Chase Bank, N.A., No. 21-2726, 2023 WL 5437811, at *11 (2d Cir. Aug. 24, 2023).
[2] “A syndicated loan is a loan extended by a group of financial institutions (a loan syndicate) to a single borrower.” Syndicated Loan Portfolios of Financial Institutions, Bd. of Governors of the Fed. Rsrv. Sys., (last visited July 30, 2023); see also Fed. Deposit Ins. Corp., Risk Management Manual of Examination Policies, Loans § 3.2-73 (May 2023) (“A syndicated loan involves two or more banks contracting with a borrower, typically a large or middle market corporation, to provide funds at specified terms under the same credit facility.”).
[3] The Reves test is used to determine whether notes are “securities” under both the Securities and Exchange Act of 1934 (the “1934 Act”) and the Securities Act of 1933 (the “1933 Act,” and together with 1934 Act, the “Securities Acts”).
[4] In the broadly syndicated loan market, one or more investment banks often agree to “arrange” a syndicate of lenders to purchase a loan (usually a “term b” loan) under a credit facility. The arrangers do not typically plan to hold the entire loan until maturity, but rather they expect to sell most (if not all) of the loan to institutional investors. For practical reasons, it is customary for the lending arm of such investments banks to be the initial lenders under the credit facility and to “front” the loan on the closing date.  Relatedly, an investment bank may have committed to provide the loan to the borrower in connection with an acquisition financing and such investment bank is “on the hook” to fund the loan at the closing of the acquisition. In each case, after closing and funding of the loan, the investment bank assigns out the loans to the syndicate who have separately agreed to purchase the loans.
[5] Kirschner, 2023 WL 5437811, at *5.
[6] Id.
[7] Id. at *13 (quoting Reves, 494 U.S. at 55-56).
[8] Reves, 494 U.S. at 67; see also Pollack v. Laidlaw Holdings, Inc., 27 F.3d 808, 811 (2d Cir. 1994); Banco Espanol de Credito v. Security Pac. Nat’l Bank, 973 F.2d 51, 55 (2d Cir. 1992).
[9] Reves, 494 U.S. at 65.
[10] Id. at 65.  The Supreme Court adopted a judicially crafted list of categories of notes that are not securities, which were originally identified by Judge Friendly in Exchange Nat;l Bank of Chi. v. Touche Ross & Co., 544 F.2d 1126 (2d Cir. 1976).  The categories of non-securities notes include: “the note delivered in consumer financing, the note secured by a mortgage on a home, the short-term note secured by a lien on a small business or some of its assets, the note evidencing a character loan to a bank customer, short-term notes secured by an assignment of accounts receivable, or a note which simply formalizes an open-account debt incurred in the ordinary course of business (particularly if, as in the case of the customer of a broker, it is collateralized)” as well as “notes evidencing loans by commercial banks for current operations.” Id. (internal quotations omitted).
[11] Id. at 66 (quotations omitted).
[12] Id. at 67.
[13] The Second Circuit noted that “[a] seller’s motivation is commercial if, for example, the note is exchanged to facilitate the purchase and sale of a minor asset or consumer good, to correct for the seller's cash-flow difficulties, or to advance some other commercial or consumer purpose.”  Kirschner, 2023 WL 5437811, at *8 (internal quotations omitted).
[14] The Second Circuit noted that “[a] buyer’s motivation is investment if it expects to profit from its investment, including through earning either variable or fixed-rate interest.” Id. (citations omitted).  While, “[a] seller’s motivation is investment if its purpose is to raise money for the general use of a business enterprise or to finance substantial investments.” Id.  (internal quotations omitted).
[15] Id. at *8-9.
[16] Id. at *9.
[17] Id. (emphasis in the original).
[18] Id. (finding that the Notes could not be assigned to a “natural person,” without prior written consent from both Millennium and the administrative agent (unless an assignment was being made to a “Lender, an affiliate of a Lender or an approved fund”), nor could any assignment total more than $1,000,000 (unless it was to a “Lender, an affiliate of a Lender, or an Approved Fund or an assignment of the entire remaining amount of the assigning Lenders” allocation.).  In the market, the prohibition on natural persons owning loans is in most (if not all) credit agreements for broadly syndicated loans.
[19] Id. at *10.
[20] Id. at *11. The Second Circuit held that the “certification [was] substantively identical to the certification made by the purchasers in Banco Espanol, which was central to [its] determination that the buyers there could not have reasonably perceived the loan participations as securities.”  Id. (citing Banco Espanol, 973 F.2d at 53, 55).
[21] The Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Securities and Exchange Commission and Federal Reserve, among others, regulate the banks that arrange and make syndicated loans.
[22] Id. at *11-12.
[23] The Trustee could, but has not yet, file for certiorari review by the United States Supreme Court.
[24] See Are TLBs “Securities?” SEC Declines to Weigh In (June 2023),
[25]The Loan Market Wins Big In Kirschner Case (August 24, 2023),