INSTRUMENT CONTAINS A WRITTEN UNCONDITIONAL PROMISE TO PAY
When an instrument contains a written unconditional promise to pay on demand or on a specified date a sum certain of money along with a fixed interest rate, the instrument resembles debt.
SUBORNINATION STATUS OF DEBT
Being subordinate to other debt indicates that the instrument represents equity.
HIGH DEBT TO EQUITY RATIO
High debt to equity ratios suggest an equity instrument because most creditors would consider such arrangement too risky to lend money to an organization with a high level of preexisting debt.
An equity classification is more likely if the holder can convert an instrument into stock.
ADVANCES PROPORTIONAL TO EQUITY HOLDINGS
Advances contributed by stockholders proportional to their equity holdings are more likely to be looked at as equity contributions.
WARNING AS A RESULT OF TOO LITTLE GUIDANCE
The lack of legislative an administrative guidance beyond the above has led courts to establish their own and additional criteria for this debt/equity classification problem. For a discussion of criteria used by courts see my legal guide entitled DEBT VERSUS EQUITY UNDER CASE LAW at the following link: https://www.avvo.com/legal-guides/ugc/debt-versus-equity-under-case-law-criteria-interpreting-section-385-1
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