Capital-Risk Test Law and Legal Definition

Capital-risk test refers to a method of determining whether a transaction constitutes an investment contract. The capital-risk test determines a transaction to be an investment contract when a substantial part of the capital is used by a franchisor which is provided by a franchisee. Additionally, the franchisor uses the capital to commence business.

The following is an example of case law defining the capital-risk test:

A capital-risk test holds that a particular financial activity constitutes an offer of an investment contract if a substantial portion of the capital which a franchisor uses to initiate its operations is being provided by the franchisees. [Artistic Door Corp. v. Rheney, 384 So. 2d 179 (Fla. Dist. Ct. App. 3d Dist. 1980)]