Republic of the Philippines Commission (SEC) issued a cease and desist order The sole issue presented before

sole issue presented before the Court is whether

SUPREME COURT (CDO) against it. As it later on turned out, the same or not PCI’s scheme constitutes an investment
Manila persons who ran the affairs of GVI directed PCI’s contract that requires registration under R.A. 8799.
actual operations.
THIRD DIVISION The Ruling of the Court
In 2001, disgruntled elements of GVI filed a complaint
G.R. No. 164197 January 25, 2012 with the SEC against PCI, alleging that the latter had The Securities Regulation Code treats investment
taken over GVI’s operations. After hearing,1 the SEC, contracts as "securities" that have to be registered
through its Compliance and Enforcement unit, issued with the SEC before they can be distributed and sold.
SECURITIES AND EXCHANGE a CDO against PCI. The SEC ruled that PCI’s
COMMISSION, Petitioner, An investment contract is a contract, transaction, or
scheme constitutes an Investment contract and, scheme where a person invests his money in a
vs. following the Securities Regulations Code,2 it should
PROSPERITY.COM, INC., Respondent. common enterprise and is led to expect profits
have first registered such contract or securities with primarily from the efforts of others.8
the SEC.
DECISION
Apart from the definition, which the Implementing
Instead of asking the SEC to lift its CDO in Rules and Regulations provide, Philippine
ABAD, J.: accordance with Section 64.3 of Republic Act (R.A.) jurisprudence has so far not done more to add to the
8799, PCI filed with the Court of Appeals (CA) a same. Of course, the United States Supreme Court,
This case involves the application of the Howey test in petition for certiorari against the SEC with an grappling with the problem, has on several occasions
order to determine if a particular transaction is an application for a temporary restraining order (TRO) discussed the nature of investment contracts. That
investment contract. and preliminary injunction in CA-G.R. SP 62890. court’s rulings, while not binding in the Philippines,
Because the CA did not act promptly on this enjoy some degree of persuasiveness insofar as they
application for TRO, on January 31, 2001 PCI are logical and consistent with the country’s best
The Facts and the Case returned to the SEC and filed with it before the lapse interests.9
of the five-day period a request to lift the CDO. On the
Prosperity.Com, Inc. (PCI) sold computer software following day, February 1, 2001, PCI moved to
and hosted websites without providing internet withdraw its petition before the CA to avoid possible The United States Supreme Court held in Securities
service. To make a profit, PCI devised a scheme in forum shopping violation. and Exchange Commission v. W.J. Howey Co.10 that,
which, for the price of US$234.00 (subsequently for an investment contract to exist, the following
increased to US$294), a buyer could acquire from it elements, referred to as the Howey test must concur:
During the pendency of PCI’s action before the SEC, (1) a contract, transaction, or scheme; (2) an
an internet website of a 15-Mega Byte (MB) capacity. however, the CA issued a TRO, enjoining the
At the same time, by referring to PCI his own down- investment of money; (3) investment is made in a
enforcement of the CDO.3 In response, the SEC filed common enterprise; (4) expectation of profits; and (5)
line buyers, a first-time buyer could earn with the CA a motion to dismiss the petition on ground
commissions, interest in real estate in the Philippines profits arising primarily from the efforts of
of forum shopping. In a Resolution,4 the CA initially others. 11 Thus, to sustain the SEC position in this
and in the United States, and insurance coverage dismissed the petition, finding PCI guilty of forum
worth ₱50,000.00. case, PCI’s scheme or contract with its buyers must
shopping. But on PCI’s motion, the CA reversed itself have all these elements.
and reinstated the petition.5
To benefit from this scheme, a PCI buyer must enlist
and sponsor at least two other buyers as his own An example that comes to mind would be the long-
In a joint resolution,6 CA-G.R. SP 62890 was term commercial papers that large companies, like
down-lines. These second tier of buyers could in turn consolidated with CA-G.R. SP 64487 that raised the
build up their own down-lines. For each pair of down- San Miguel Corporation (SMC), offer to the public for
same issues. On July 31, 2003 the CA rendered a raising funds that it needs for expansion. When an
lines, the buyer-sponsor received a US$92.00 decision, granting PCI’s petition and setting aside the
commission. But referrals in a day by the buyer- investor buys these papers or securities, he invests
SEC-issued CDO.7 The CA ruled that, following his money, together with others, in SMC with an
sponsor should not exceed 16 since the commissions the Howey test, PCI’s scheme did not constitute an
due from excess referrals inure to PCI, not to the expectation of profits arising from the efforts of those
investment contract that needs registration pursuant who manage and operate that company. SMC has to
buyer-sponsor. to R.A. 8799, hence, this petition. register these commercial papers with the SEC before
offering them to investors.
1âwphi1

Apparently, PCI patterned its scheme from that of The Issue Presented
Golconda Ventures, Inc. (GVI), which company
stopped operations after the Securities and Exchange 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 profits 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 ₱50,000.00 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
profit 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.

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.