Title
Supreme Court
Securities and Exchange Commission vs. Prosperity.com, Inc.
Case
G.R. No. 164197
Decision Date
Jan 25, 2012
PCI sold websites, offering commissions for referrals; SEC deemed it an unregistered investment contract. Supreme Court ruled it was not, as profits relied on buyers' efforts, not PCI's.

Case Digest (G.R. No. 164197)
Expanded Legal Reasoning Model

Facts:

  • Parties and Background
    • The Securities and Exchange Commission (SEC) issued a cease and desist order (CDO) against Prosperity.Com, Inc. (PCI) in 2001, finding that PCI’s scheme constituted an unregistered investment contract under the Securities Regulation Code (Republic Act No. 8799).
    • PCI is a company that sold computer software and hosted websites without providing internet service.
  • PCI’s Business and Compensation Scheme
    • Website Sale
      • PCI offered a 15-Megabyte capacity internet website for US$234.00 (later increased to US$294.00).
      • Buyers received a tangible product (the hosted website) to use for their own online activities.
    • Network Marketing Component
      • A first-time buyer could earn incentives—commissions, interests in real estate (Philippines and U.S.), and insurance coverage worth ₱50,000—by referring down-line buyers.
      • Each buyer-sponsor had to enlist at least two down-line buyers to qualify; for every pair of down-lines, the sponsor received US$92.00. Referrals were capped at 16 per day, with excess commissions reverting to PCI.
      • PCI patterned its scheme after Golconda Ventures, Inc. (GVI), and was managed by the same individuals who ran GVI prior to its closure by SEC order.
  • Procedural History
    • SEC Compliance and Enforcement Unit issued CDO in 2001 (CED Case No. 01-2585).
    • PCI filed a petition for certiorari with an application for a temporary restraining order (TRO) and preliminary injunction before the Court of Appeals (CA) in CA-G.R. SP 62890 but later withdrew to avoid forum shopping.
    • Despite withdrawal, the CA issued a TRO; SEC moved to dismiss for forum shopping. The CA initially dismissed, then reinstated the petition.
    • CA-G.R. SP 62890 was consolidated with CA-G.R. SP 64487. On July 31, 2003, the CA set aside the CDO, ruling that PCI’s scheme was not an investment contract under the Howey test.
    • SEC elevated the case to the Supreme Court via G.R. No. 164197, challenging the CA’s ruling.

Issues:

  • Whether PCI’s website sale and network marketing scheme constitute an “investment contract” requiring registration under Republic Act No. 8799 (Securities Regulation Code).

Ruling:

  • (Subscriber-Only)

Ratio:

  • (Subscriber-Only)

Doctrine:

  • (Subscriber-Only)

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