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SECURITIES v. PROSPERITY.COM

FACTS:

Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing internet service. They devised a scheme wherein a buyer can acquire an internet website of a 15-Mega Byte (MB) capacity for the price of US$234.00. The buyer can also earn commissions, interest in real estate, and insurance coverage worth P50,000.00 by referring their own down-line buyers. To benefit from the scheme, a buyer must enlist and sponsor at least two other buyers as their own down-lines. PCI's scheme was patterned after Golconda Ventures, Inc. (GVI) which ceased operations due to a cease and desist order (CDO) by the Securities and Exchange Commission (SEC). Disgruntled individuals of GVI filed a complaint against PCI alleging that PCI had taken over GVI's operations. The SEC issued a CDO against PCI, ruling that their scheme constitutes an investment contract that should have been registered with the SEC.

ISSUES:

  1. Whether or not PCI's scheme constitutes an investment contract that requires registration under R.A. 8799.

RULING:

  1. No, PCI's scheme does not constitute an investment contract that requires registration under R.A. 8799.

    The Court concluded that PCI's scheme lacks the last requisite of the Howey test—expectation of profits arising primarily from the efforts of others. PCI's clients buy a tangible asset (an Internet website) and do not invest money for PCI to use in generating profits for the investors. The commissions, interest in real estate, and insurance coverage are mere incentives rather than profits from investment.

PRINCIPLES:

  • Investment Contracts as Securities: Investment contracts need to be registered with the SEC before being distributed and sold (Securities Regulation Code).

  • Howey Test Elements: For an investment contract to exist, a contract, transaction, or scheme must involve (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) primarily from the efforts of others.

  • Network Marketing: Network marketing schemes like PCI's, where the primary activity involves the sale of tangible products with commissions as sales incentives, do not meet the criteria for an investment contract under the Howey test.