SEC v. Prosperity.com, Inc.G.R. No. 164197, January 25, 2012

​FACTS:
​Prosperity.com, Inc. (PCI) sold computer software and hosted websites without
providing internet service. PCI devised a scheme wherein a buyer of its services gets
incentives and commissions by sponsoring and referring down-line buyers to PCI. This
second tier of buyers could in turn build up their own down-lines. PCI patterned its
scheme from that of Golconda Ventures, Inc. a company that stopped operations
after the SEC issued a cease and desist order against it. Golconda Ventures filed a
complaint against PCI with SEC alleging that PCI had taken over Golconda’s
operations. The SEC ruled that PCI’s scheme constitutes an investment contract, and
following the Securities and Regulation Code, it should have been registered with the
SEC. Instead of asking the SEC to lift its cease and desist order, PCI filed a petition for
certiorari against the SEC with the CA, which held that, following the Howey Test, PCI’s
scheme is not an investment contract that needs SEC registration. Hence, this petition.

ISSUE:
W/N PCI’s scheme constitutes an investment contract that requires SEC
registration.

RULING:
​No. The Securities Regulation Code treats investment contracts as “securities” that
have to be registered with the SEC before they can be distributed and sold. An
investment contract is a contract, transaction, or scheme where a person invests his
money in a common enterprise and is led to expect profits primarily from the efforts of
others. Following the Howey Test, for an investment contract to exist, the following
elements must concur:
1) a contract, transaction, or scheme;
2) an investment of money;
3) investment is made in a common enterprise;
4) expectation of profits; and
5) profits arising primarily from the efforts of others.
Here, PCI’s clients do not make investments. They buy a product of some value to them
- internet website, and the buyers of the website do not invest money in PCI that could
be used to run a business that would generate profits for the investors. PCI is engaged
in network marketing, a scheme adopted by companies for getting people to buy their
products where the buyer can become a down-line seller, who earns commissions from
purchases made by new buyers whom he refers to the person who sold the product to
him. The commissions, interest in real estate, and insurance coverage are incentives to
down-line sellers to bring in other customers, which can hardly be regarded as profits
from investment of money under the Howey Test. Therefore, PCI’s scheme does not
constitute an investment contract that requires SEC registration.