Securities and Exchange Commission

v.
Prosperity. com, Inc.
G.R. No. 164197
January 25, 2012

Facts:

Prosperity.com, Inc. (PCI) came up with a scheme wherein a buyer of its services gets
incentives and commissions by sponsoring and referring down-line buyers to PCI. This scheme
was patterned after another company that stopped operations after being enjoined by SEC.
Aggrieved, elements of the other company filed a complaint against PCI with SEC, where the
latter held that PCI’s scheme constitutes an investment contract, which should have been
registered with the same. 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. Hence, this petition.

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

Ruling: No.

Investment contracts are “securities” that have to be registered with the SEC before they
can be distributed and sold; a contract, transaction, or scheme where a person invests his money
in a common enterprise and is led to expect profits primarily for the efforts of others. Following
the Howey Test, for an investment contract to exist, the following elements 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. In
this case, PCI’s clients do not make such investments; rather they are engage in network
marketing, a scheme adopted by companies for getting people to buy their products where the
buyer can become a down-line seller, who earns commissions from purchases made by new
buyers whom he refers to the person who sold the product to him, is not an investment contract.
The commissions, interest in real estate, and insurance coverage are incentives to down-line
sellers to bring in other customers which can hardly be regarded as profits from investment of
money under the Howey Test.