Family Resemblance test Law and Legal Definition

Family resemblance test refers to a method of analyzing a debt instrument that is having a horizontal commonality. Horizontal commonality means pooling of interests, not only between the seller and each individual buyer, but also among all those who buy an investment contract in the same venture.[McNabb v. SEC, 298 F.3d 1126 (9th Cir. Cal. 2002)].

The following are the four factors to be considered while applying the family resemblance test:

1.The motivation that prompts a reasonable buyer and seller to enter into the transaction in question;

2.The plan of distribution of the instrument;

3.The reasonable expectations of the investing public; and

4.The existence of an alternate regulatory scheme reducing the risk of the instrument.