G.R. No. 164197, 25 January 2012


Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing internet service. To make a profit, 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 first-time buyer could earn commissions, interest in real estate in the Philippines and in the United States, and insurance coverage worth ₱50,000.00.

To benefit 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 filed a complaint with the SEC against PCI, alleging that the latter had taken over GVI’s operations. After hearing, 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, it should have first registered such contract or securities with the SEC. Aggrieved, PCI filed a petition for certiorari with CA, which held that PCI’s scheme is not an investment contract following the Howey Test, which needed to be registered with SEC.


Whether or not PCI’s scheme constitutes an investment contract that requires registration.


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. 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 profits; and
(5) profits arising primarily from the efforts of others. Thus, to sustain the SEC position in this case, PCI’s scheme or contract with its buyers must have all these elements.

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.

*Case Digest by Catherine C. Velasco, LLB-IV, Andres Bonifacio Law School, SY 2019-2020