G.R. No. 164197 ; January 25, 2012
SECURITIES AND EXCHANGE COMMISSION, Petitioner, vs. PROSPERITY.COM, INC., Respondent.

FACTS

Respondent Prosperity.Com, Inc. (PCI) sold computer software and hosted websites. It devised a scheme where a buyer, for US$234 (later US$294), could acquire a 15-MB internet website. The buyer could also earn commissions, interests in real estate in the Philippines and the U.S., and insurance coverage worth ₱50,000 by referring “down-line” buyers. To benefit, a buyer must sponsor at least two other buyers, who could then build their own down-lines. The buyer-sponsor received a US$92 commission for each pair of down-lines, with a daily cap of 16 referrals; excess commissions inured to PCI. The scheme was patterned after Golconda Ventures, Inc. (GVI), which ceased operations after the SEC issued a cease and desist order (CDO) against it; the same persons behind GVI directed PCI’s operations. In 2001, disgruntled GVI elements filed a complaint with the SEC against PCI. The SEC, through its Compliance and Enforcement unit, issued a CDO against PCI, ruling that its scheme constituted an unregistered investment contract under the Securities Regulation Code (R.A. 8799). PCI initially filed a petition for certiorari with the Court of Appeals (CA) but later moved to withdraw it and instead filed a request with the SEC to lift the CDO. The CA, however, issued a TRO enjoining the CDO’s enforcement. After proceedings, the CA granted PCI’s petition and set aside the SEC’s CDO, ruling that PCI’s scheme did not constitute an investment contract under the Howey test.

ISSUE

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

RULING

No. The Supreme Court affirmed the CA’s decision, holding that PCI’s scheme does not constitute an investment contract under the Howey test. An investment contract, treated as a “security” under R.A. 8799, is a contract, transaction, or scheme where a person invests money in a common enterprise and is led to expect profits primarily from the efforts of others. Applying the Howey test, the following elements must concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others. The Court found that PCI’s clients were not making an investment. The payment of US$234 was consideration for the purchase of a tangible product—a 15-MB website—which the client could use for their own purposes. The scheme was essentially network marketing, where commissions and other incentives were rewards for referring new customers, not profits from an investment of money in a common enterprise. Crucially, the last element of the Howey test was absent: any profits or returns did not arise primarily from the efforts of others (i.e., PCI), but from the buyer’s own efforts in recruiting down-lines. The Court emphasized that it was PCI, not the buyers, that expected profits from the marketing of its products. Therefore, the scheme was not an investment contract requiring SEC registration.