Case Summary (G.R. No. 119786)
Petitioner
Securities and Exchange Commission (SEC), through its Compliance and Enforcement unit, which issued a cease and desist order (CDO) against PCI.
Respondent
Prosperity.Com, Inc. (PCI), challenging the SEC’s classification of its marketing scheme as an unregistered investment contract.
Key Dates
• 2001 – PCI begins offering web‐hosting packages and recruiting buyers under a multi‐level referral structure.
• January 31, 2001 – PCI files a request with the SEC to lift the CDO.
• February 1, 2001 – PCI moves to withdraw its appeal in the Court of Appeals (CA).
• July 31, 2003 – CA decision sets aside the SEC’s CDO.
• January 25, 2012 – Supreme Court decision denying PCI’s petition.
Applicable Law
• 1987 Philippine Constitution (granting the SEC authority to regulate securities)
• Securities Regulation Code (Republic Act No. 8799) and its Implementing Rules and Regulations (IRR, Rule 3.1-1) defining “investment contract.”
• U.S. jurisprudence (Howey test) applied with persuasive value to Philippine securities law.
Facts and Procedural History
PCI sold web‐hosting services for US$234 (later US$294) and rewarded purchasers with commissions (US$92 per two recruited buyers), interests in Philippine and U.S. real estate, and insurance coverage. Buyers had to recruit at least two “down‐line” purchasers, who could further recruit others. Disgruntled former GVI affiliates lodged a complaint that PCI had taken over GVI’s network marketing. The SEC issued a CDO, holding PCI’s scheme to be an unregistered investment contract under R.A. 8799. PCI sought relief via certiorari in the CA (CA-G.R. SP 62890), then requested the SEC to lift the CDO to avoid forum shopping. The CA initially dismissed PCI’s petition for forum shopping but later reinstated it. The CA ultimately granted PCI’s petition on July 31, 2003, concluding that its scheme did not satisfy the Howey test.
Issue
Does PCI’s network‐marketing scheme constitute an “investment contract” requiring registration under the Securities Regulation Code (R.A. 8799)?
Ruling and Reasoning
The Supreme Court affirmed the CA, applying the Howey test’s five elements: (1) scheme; (2) investment of money; (3) common enterprise; (4) expectation of profits; (5) profits derived primarily from the efforts of others. Although PCI’s offering was a “scheme” involving payment and referral‐based incentives, buyers purchased a tangible service—a
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Facts and Case Background
- Prosperity.Com, Inc. (PCI) sold computer software and hosted websites without providing internet service
- Initial price of US$234.00 (later increased to US$294.00) for a 15-Mega Byte website capacity
- Buyers could earn commissions (US$92 per pair of down-line referrals), interests in Philippine and U.S. real estate, and P50,000 insurance coverage by sponsoring at least two down-line buyers
- Daily referral commissions capped at 16 pairs; excess referrals’ commissions accrued to PCI
- Scheme modeled after Golconda Ventures, Inc. (GVI); key operators of GVI directed PCI’s actual operations
SEC Investigation and Cease and Desist Order
- In 2001, former GVI elements filed complaint with the SEC alleging PCI’s takeover of GVI operations
- SEC Compliance and Enforcement unit conducted hearings (docketed as CED Case 01-2585)
- SEC issued a Cease and Desist Order (CDO) dated February 14, 2001, ruling PCI’s scheme an unregistered investment contract under Republic Act 8799
PCI’s Procedural Maneuvers
- PCI filed a petition for certiorari with the Court of Appeals (CA-G.R. SP 62890) seeking TRO and preliminary injunction instead of lifting the CDO under Section 64.3 of R.A. 8799
- CA did not act promptly; PCI requested the SEC to lift the CDO within the five-day period and withdrew its CA petition to avoid forum shopping (motion filed February 1, 2001)
- Despite withdrawal, CA issued a TRO enjoining CDO enforcement; SEC moved to dismiss for forum shoppi