Petitioner Vs Vs Respondent: Third Division

THIRD DIVISION
[G.R. No. 164197. January 25, 2012.]
SECURITIES AND EXCHANGE COMMISSION , petitioner, vs .

PROSPERITY.COM, INC. , respondent.
DECISION
ABAD , J : p
This case involves the application of the Howey test in order to determine if a
particular transaction is an investment contract.
The Facts and the Case
Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without
providing internet service. To make a pro t, PCI devised a scheme in which, for the
price of US$234.00 (subsequently increased to US$294), a buyer could acquire from it
an internet website of a 15-Mega Byte (MB) capacity. At the same time, by referring to
PCI his own down-line buyers, a rst-time buyer could earn commissions, interest in
real estate in the Philippines and in the United States, and insurance coverage worth
P50,000.00.
To bene t from this scheme, a PCI buyer must enlist and sponsor at least two
other buyers as his own down-lines. These second tier of buyers could in turn build up
their own down-lines. For each pair of down-lines, the buyer-sponsor received a
US$92.00 commission. But referrals in a day by the buyer-sponsor should not exceed
16 since the commissions due from excess referrals inure to PCI, not to the buyer-
sponsor.
Apparently, PCI patterned its scheme from that of Golconda Ventures, Inc. (GVI),
which company stopped operations after the Securities and Exchange Commission
(SEC) issued a cease and desist order (CDO) against it. As it later on turned out, the
same persons who ran the affairs of GVI directed PCI's actual operations.
In 2001, disgruntled elements of GVI led a complaint with the SEC against PCI,
alleging that the latter had taken over GVI's operations. After hearing, 1 the SEC, through
its Compliance and Enforcement unit, issued a CDO against PCI. The SEC ruled that
PCI's scheme constitutes an Investment contract and, following the Securities
Regulations Code, 2 it should have rst registered such contract or securities with the
SEC.
Instead of asking the SEC to lift its CDO in accordance with Section 64.3 of
Republic Act (R.A.) 8799, PCI led with the Court of Appeals (CA) a petition for
certiorari against the SEC with an application for a temporary restraining order (TRO)
and preliminary injunction in CA-G.R. SP 62890. Because the CA did not act promptly on
this application for TRO, on January 31, 2001 PCI returned to the SEC and led with it
before the lapse of the ve-day period a request to lift the CDO. On the following day,
February 1, 2001, PCI moved to withdraw its petition before the CA to avoid possible
forum shopping violation. SHacCD
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During the pendency of PCI's action before the SEC, however, the CA issued a
TRO, enjoining the enforcement of the CDO. 3 In response, the SEC led with the CA a
motion to dismiss the petition on ground of forum shopping. In a Resolution, 4 the CA
initially dismissed the petition, nding PCI guilty of forum shopping. But on PCI's
motion, the CA reversed itself and reinstated the petition. 5
In a joint resolution, 6 CA-G.R. SP 62890 was consolidated with CA-G.R. SP
64487 that raised the same issues. On July 31, 2003 the CA rendered a decision,
granting PCI's petition and setting aside the SEC-issued CDO. 7 The CA ruled that,
following the Howey test, PCI's scheme did not constitute an investment contract that
needs registration pursuant to R.A. 8799, hence, this petition.
The Issue Presented
The sole issue presented before the Court is whether or not PCI's scheme
constitutes an investment contract that requires registration under R.A. 8799.
The Ruling of the Court
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 pro ts primarily from the efforts of
others. 8
Apart from the de nition, which the Implementing Rules and Regulations provide,
Philippine jurisprudence has so far not done more to add to the same. Of course, the
United States Supreme Court, grappling with the problem, has on several occasions
discussed the nature of investment contracts. That court's rulings, while not binding in
the Philippines, enjoy some degree of persuasiveness insofar as they are logical and
consistent with the country's best interests. 9
The United States Supreme Court held in Securities and Exchange Commission v.
W.J. Howey Co. 1 0 that, for an investment contract to exist, the following elements,
referred to as the Howey test must concur: (1) a contract, transaction, or scheme; (2)
an investment of money; (3) investment is made in a common enterprise; (4)
expectation of pro ts; and (5) pro ts arising primarily from the efforts of others. 1 1
Thus, to sustain the SEC position in this case, PCI's scheme or contract with its buyers
must have all these elements.
An example that comes to mind would be the long-term commercial papers that
large companies, like San Miguel Corporation (SMC), offer to the public for raising
funds that it needs for expansion. When an investor buys these papers or securities, he
invests his money, together with others, in SMC with an expectation of pro ts arising
from the efforts of those who manage and operate that company. SMC has to register
these commercial papers with the SEC before offering them to investors.
Here, PCI's clients do not make such investments. They buy a product of some
value to them: an Internet website of a 15-MB capacity. The client can use this website
to enable people to have internet access to what he has to offer to them, say, some
skin cream. The buyers of the website do not invest money in PCI that it could use for
running some business that would generate pro ts for the investors. The price of
US$234.00 is what the buyer pays for the use of the website, a tangible asset that PCI
creates, using its computer facilities and technical skills.
Actually, PCI appears to be engaged in network marketing, a scheme adopted by
companies for getting people to buy their products outside the usual retail system
where products are bought from the store's shelf. Under this scheme, adopted by most
health product distributors, the buyer can become a down-line seller. The latter earns
commissions from purchases made by new buyers whom he refers to the person who
sold the product to him. The network goes down the line where the orders to buy come.
The commissions, interest in real estate, and insurance coverage worth
P50,000.00 are incentives to down-line sellers to bring in other customers. These can
hardly be regarded as profits from investment of money under the Howey test.
The CA is right in ruling that the last requisite in the Howey test is lacking in the
marketing scheme that PCI has adopted. Evidently, it is PCI that expects pro t from the
network marketing of its products. PCI is correct in saying that the US$234 it gets from
its clients is merely a consideration for the sale of the websites that it provides.aSHAIC
WHEREFORE , the Court DENIES the petition and AFFIRMS the decision dated
July 31, 2003 and the resolution dated June 18, 2004 of the Court of Appeals in CA-G.R.
SP 62890.
SO ORDERED.
Velasco, Jr., Peralta, Mendoza and Perlas-Bernabe, JJ., concur.
Footnotes
1.Docketed as CED Case 01-2585.

2.Republic Act 8799.
3.Resolution dated February 14, 2001.
4.Dated March 13, 2001.
5.Resolution dated April 30, 2001.
6.Resolution dated July 6, 2001.

7.Penned by Justice Eloy R. Bello, Jr. and concurred in by Justice Cancio C. Garcia (a retired
member of this Court) and Justice Mariano C. Del Castillo (currently, a member of this
Court).
8.Implementing Rules and Regulations of R.A. 8799, Rule 3.1-1.

9.See Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, G.R. No.
167330, September 18, 2009, 600 SCRA 413, 427, citing Prudential Guarantee and
Assurance, Inc. v. Trans-Asia Shipping Lines, Inc., 524 Phil. 716 (2006).
10.328 US 293 (1946).
11.See also United Housing Foundation, Inc. v. Forman, 421 US 837 (1975); Securities and
Exchange Commission v. Glen W. Turner Enterprises, Inc., 474 F. 2d 476 (1973).

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THIRD DIVISION

[G.R. No. 164197. January 25, 2012.]

SECURITIES AND EXCHANGE COMMISSION , petitioner, vs .

CD Technologies Asia, Inc. © 2018 cdasiaonline.com

1.Docketed as CED Case 01-2585.

3.Resolution dated February 14, 2001.

4.Dated March 13, 2001.

5.Resolution dated April 30, 2001.

6.Resolution dated July 6, 2001.

8.Implementing Rules and Regulations of R.A. 8799, Rule 3.1-1.

CD Technologies Asia, Inc. © 2018 cdasiaonline.com

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