Updated: Nov 16, 2021

Below is a Bulletin that COR CLEARING published several months ago dealing with Convertible Notes. It's important to focus on COR's required analysis under the REVES and SCOTTSDALE cases that I have been recently talking about in determining whether a convertible note is really a security.

 COR Clearing constantly evaluates its processes and procedures relative to reviews and sales of HRS deposits, including means to reduce risks to both COR Clearing and its correspondents.  As part of these efforts, we are implementing the following set of enhanced requirements for all notes that correspondents seek to deposit with COR Clearing.   

            Satisfying the 4 Reves Factors.  In its recent Scottsdale Capital Advisors Corporation et al.decision, FINRA’s Office of Hearing Officers cited the United States Supreme Court decision in Reves v. Ernst & Young, 494 U.S. 56 (1990) and stated that 4 factors should be considered in deciding whether a note is a security:

  1. whether the note seller’s purpose is to raise money for general use of business or to finance substantial investments, and the note buyer is motivated by the profit to be generated, in contrast to a note to facilitate a minor purchase or sale or to correct for cash-flow difficulties;

  2. whether the note involves an individual transaction or common trading for speculation or investment; 

  3. whether there is a reasonable public expectation that the note would be viewed as security;

  4. whether another regulatory scheme applies that would reduce risk of the instrument.

            Accordingly, for any convertible note submitted by correspondents—promissory, demand, or otherwise—correspondents must provide an opinion of counsel detailing why any such note meets each and every of the Revesfactors described above and is therefore a security.  In the event a note does not meet these Reves factors, the note will not be considered a security and any holding or tacking period allowed by 17 CFR 230.144 (“Rule 144”) will not commence until the note is converted into shares.  This may result in the depositor having to hold the shares for 6 months after a conversion in order for the shares to be eligible for sale.  By way of illustration only, notes issued as payment for consulting or legal services are not likely to meet the Reves factors and will not be considered a security. 


            Further, for any notes or other deposits that involve the sale of unregistered securities, the opinion of counsel must include explicit and exact evidence that such securities are exempt from registration.  As explained in the Scottsdale case, counsel are expected to enumerate and personally verify the facts upon which they are relying in reaching their legal opinions. Mere conclusory statements will not be accepted by COR Clearing and we may reject the notes for deposit.  

            Due to the additional work and resources that COR Clearing will need to invest and spend to review any opinion of counsel or other documentation provided by correspondents concerning the Reves factors and claimed exemptions from registration, Correspondents electing to submit notes will be charged, in addition to any ordinary course review fee, $250.00 per note review.

            Repeated Conversion of Shares from Notes.  In some instances, COR Clearing will receive continuing requests for the sale of shares issued by repeated conversion from an underlying debt instrument such as notes or convertible preferred or warrants. If a large number of shares are issued, deposited and sold within a relatively short period of time, the depositing customer may be considered an underwriter or affiliate and therefore the shares may not be entitled to any safe harbor holding periods or other exemptions under Rule 144. (For example, regulators view 4.9% or 9.9% blockers as an attempt to circumvent the requirements of Rule 144 for the sole purpose of bringing unregistered shares to market.) 

            In such instances, we may, in our sole discretion, require that correspondents submit an opinion of counsel stating whether counsel has determined that the issuance, depositing and selling of shares do not constitute an attempt to circumvent Rule 144’s requirements.  The opinion must provide explicit and exact and verifiable evidence in support of any such conclusions, and mere conclusory statements will not be accepted by COR.  Absent a satisfactory opinion of counsel or other evidence, COR Clearing may reject subsequent requests for the sales of shares or defer consideration of allowing further sales for at least 6 months in keeping with the requirements of Rule 144.  In addition to any ordinary course review fee, we will charge $200.00 for the additional review required in these situations.   Correspondents should be aware that this review request will expose shares sold prior to approval to buy-in by COR Clearing. 

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We appreciate the importance of our HRS services to correspondents and their customers and we are implementing the above measures so as to help reduce any potential accompanying risks.  

The guidelines set forth in COR Clearing’s Correspondent Guidebook for Heightened Risk Securities remain in full effect and all deposits submitted to COR Clearing will continue to be subject thereto.

Please continue to direct all communications regarding HRS deposits to Megan Palmer (Associate Attorney Corporate Services) at or (858) 353-6573.  Please continue to direct any inquiries regarding this Notice to Michael Scaplen (Senior Vice President, Sales and Relationship Management) at or (732) 635-2490.

So this bulletin outlines CORS new procedures and requirements for clearing convertible note stock which means that the toxic note lenders now have a much more difficult hill to climb, especially if any requests to the T/A to issue unrestricted unregistered securities is met with a "counter Rule-144 opinion" by the issuers securities counsel.

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