Legal Definitions - label-and-significant-characteristics test

The label-and-significant-characteristics test is a rule that applies to securities. It states that if an instrument is labeled as a stock and has the significant characteristics that are usually associated with shares of stock, then it will be governed by the securities laws.

For example, if a company issues an instrument that is labeled as a stock and has the same rights and privileges as common stock, then it will be considered a security and will be subject to the securities laws. On the other hand, if the instrument is labeled as a partnership interest and does not have the same characteristics as common stock, then it will not be considered a security.

This test is important because it helps to determine whether an instrument is a security or not. If an instrument is considered a security, then it must comply with the securities laws, which are designed to protect investors and ensure that companies provide accurate and complete information to the public.