By: Elizabeth Sloop

When a borrower requires a loan too large for a single lender’s capital base, a group of lenders, or syndicate, may step in to provide funds.[1]  By participating in syndicated lending, the lenders, typically banks and non-bank financial institutions,[2] are able to distribute the risk of default among themselves.[3]  Because of the size of the loans and the frequency with which they are used for financing in Corporate America, syndicated loans represent trillions of dollars annually.[4] Additionally, shares of the loans are then traded in the secondary market.[5]

A syndicated loan transaction was at issue in Kirschner v. JP Morgan Chase Bank, N.A.,[6] a case which was recently decided on appeal by the Second Circuit.  The case turned on whether the notes issued as part of the transaction were securities[7] under Reves v. Ernst & Young.[8]  In affirming the lower court’s decision, the Second Circuit upheld the market convention that the notes issued in syndicated loans are not securities subject to securities claims.[9]  While market participants are surely breathing a sigh of relief, they should use the Kirschner decision as guidance for structuring syndicated loan transactions to abide by the Reves precedent and mitigate the risk of characterization of notes as securities.  Avoiding this characterization is critical for industry because of the potential ramifications of such a classification given the magnitude of the syndicated lending market.[10]

In Kirschner, the court applied the Reves four-factor balancing test,[11] known as the “family resemblance” test,[12] to determine whether the notes were securities.[13]  The Second Circuit affirmed the lower court’s finding that three of the factors – the plan of distribution, the reasonable expectations of the investing public, and the existence of other risk-reducing factors – weighed against the conclusion that the notes at issue were securities.[14]  One factor, the motivations of the parties, weighed in favor of the conclusion that the notes were securities because of the parties’ mixed motivations.[15]

Looking to the Kirschner decision for guidance, several considerations arise for participants in syndicated lending.  First, the effect of restrictions on assignment should be contemplated.  In Kirschner, the court considered the fact that the notes could not be assigned to any natural person and not without prior written consent from both seller and lender.[16]  By including similar restrictions on assignment in their terms for future loans, lenders may predict that a court would construe the restrictions against a finding that the note is a security, as the Kirschner court did.[17]  Participants in syndicated lending should also choose their language carefully when drafting loan documents. The Kirschner court, in its analysis of the public’s reasonable perceptions, took note of the loan documents’ consistent usage of the term “lenders” to refer to the buyers while disregarding the occasional reference to the buyers as “investors.”[18]  Next, participants should consider the collateralization of the notes and the makeup of the syndicate.  In its analysis of the existence of other risk-reducing factors, the court considered the fact that the notes were secured and the existence of specific policy guidance issued by federal regulators for banks.[19]  By ensuring that the notes are secured and that the syndicate includes lenders, such as banks, who are already subject to another regulatory scheme, participants may predict that this factor in the balancing test would weigh in their favor, supporting the conclusion that the notes are not securities.

[1] See Troy Segal, Syndicated Loan: What It Is, How It Works, Examples, Investopedia (updated June 22, 2020),

[2] Syndicated Loan Portfolios of Financial Institutions, Bd. of Governors of the Fed. Rsrv. Sys. (last updated June 16, 2023), [hereinafter Portfolios].

[3] See Segal, supra note 1.

[4] See $5T Syndicated Loan Market Readies for Data-Driven Digital Makeover, PYMNTS (Dec. 22, 2022),,tens%20of%20billions%20of%20dollars [hereinafter, Market].

[5] Portfolios, supra note 2.

[6] Kirschner v. JP Morgan Chase Bank, N.A., No. 21-2726, 2023 U.S. App. LEXIS 22327 (2d Cir. Aug. 24, 2023).

[7] Id. at *3.

[8] Reves v. Ernst & Young, 494 U.S. 56 (1990).

[9] See The Loan Market Wins Big in Kirschner Case, LSTA (Aug. 24, 2023),

[10] See Market, supra note 4; Peter I. Altman et al., Second Circuit Considers Whether Syndicated Term Loans are Securities, Akin Gump (June 1, 2022)(explaining that a holding that the notes are securities would result in “practical complications and compliance costs for loan and CLO [collateralized loan obligation] market participants” in addition to insider trading implications and other significant consequences),

[11] Reves, 494 U.S. at 66-67 (explaining that the test begins with a rebuttable presumption that every note is a security, that the presumption may be rebutted if the note in question “bears a strong resemblance” to an enumerated list of instruments that are not securities, and that the resemblance is determined by the result of the multi-factor balancing test: (1) the motivations of 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) whether an outside factor significantly reduces the risk of the instrument).

[12] See Peter Davis et al., The Limits of Applying Reves v. Ernst & Young to DeFi and the Perils of Regulating Web3 by Enforcement, JD SUPRA (Jan. 26, 2022)(“To determine what kinds of notes qualify, the Court adopted the ‘family resemblance test,’ which features a grab-bag of legal concepts, including a rebuttable presumption, seven potential analogies, and a multifactor balancing test.”),

[13] Kirschner, 2023 U.S. App. LEXIS, at *17.

[14] Id. at *28.

[15] Id. at *21 (noting that while the seller’s motivation was commercial, the lenders’ motivation was investment because they “expected to profit from their purchase of the notes”).

[16] Id. at *23.

[17] Id.

[18] Kirschner, 2023 U.S. App. LEXIS, at *26.

[19] Id. at *29.

Share this post