Power Homes Unlimited Copr., vs SEC
G.R. No. 164182
February 26, 2008
Facts:
The
scheme of the [petitioner] corporation requires an investor to become a
Business Center Owner (BCO) who must fill-up and sign its application form. The
Terms and Conditions printed at the back of the application form indicate that
the BCO shall mean an independent representative of Power Homes, who is
enrolled in the company’s referral program and who will ultimately purchase
real property from any accredited real estate developers and as such he is
entitled to a referral bonus/commission. Paragraph 5 of the same indicates that
there exists no employer/employee relationship between the BCO and the Power
Homes Unlimited, Corp.
The BCO is required to pay US$234 as his
enrollment fee. His enrollment entitles him to recruit two investors who should
pay US$234 each and out of which amount he shall receive US$92. In case the two
referrals/enrollees would recruit a minimum of four (4) persons each recruiting
two (2) persons who become his/her own down lines, the BCO will receive a total
amount of US$147.20 after deducting the amount of US$36.80 as property fund
from the gross amount of US$184. After recruiting 128 persons in a period of
eight (8) months for each Left and Right business groups or a total of 256
enrollees whether directly referred by the BCO or through his down lines, the
BCO who receives a total amount of US$11,412.80 after deducting the amount of
US$363.20 as property fund from the gross amount of US$11,776, has now an
accumulated amount of US$2,700 constituting as his Property Fund placed in a
Property Fund account with the Chinabank. This accumulated amount of US$2,700
is used as partial/full down payment for the real property chosen by the BCO
from any of [petitioner’s] accredited real estate developers.
Issue:
Whether
Power Homes engage in the sale of security?
Held:
Yes; an
investment contract is a "contract, transaction or scheme (collectively
‘contract’) whereby a person invests his money in a common enterprise and is
led to expect profits primarily from the efforts of others."
Our
definition of an investment contract traces its roots from the 1946 United
States (US) case of SEC v. W.J. Howey Co. In this case, the US Supreme Court
was confronted with the issue of whether the Howey transaction constituted an
"investment contract" under the Securities Act’s definition of
"security." The US Supreme Court, recognizing that the term
"investment contract" was not defined by the Act or illumined by any
legislative report, held that "Congress was using a term whose meaning had
been crystallized" under the state’s "blue sky" laws in
existence prior to the adoption of the Securities Act. Thus, it ruled that the
use of the catch-all term "investment contract" indicated a
congressional intent to cover a wide range of investment transactions. It
established a test to determine whether a transaction falls within the scope of
an "investment contract." Known as the Howey Test, it requires a transaction, contract, or scheme
whereby a person (1) makes an investment of money, (2) in a common enterprise,
(3) with the expectation of profits, (4) to be derived solely from the efforts
of others. Although the proponents must establish all four elements, the
US Supreme Court stressed that the Howey Test "embodies a flexible rather than a static principle, one
that is capable of adaptation to meet the countless and variable schemes
devised by those who seek the use of the money of others on the promise of
profits." Needless
to state, any investment contract covered by the Howey Test must be registered
under the Securities Act, regardless of whether its issuer was engaged in
fraudulent practices.
After
Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises, Inc. et
al. In this case, the 9th Circuit of the US Court of Appeals
ruled that the element that profits must come "solely" from the
efforts of others should not be given a strict interpretation. It held that a
literal reading of the requirement "solely" would lead to unrealistic
results. It reasoned out that its flexible reading is in accord with the
statutory policy of affording broad protection to the public. Our R.A. No. 8799
appears to follow this flexible concept for it defines an investment contract
as a contract, transaction or scheme (collectively "contract")
whereby a person invests his money in a common enterprise and is led to
expect profits not solely but primarily from the efforts of others. Thus,
to be a security subject to regulation by the SEC, an investment contract in
our jurisdiction must be proved to be: (1) an investment of money, (2) in a
common enterprise, (3) with expectation of profits, (4) primarily from
efforts of others.
Prescinding
from these premises, we affirm the ruling of the public respondent SEC and the
Court of Appeals that the petitioner was engaged in the sale or distribution of
an investment contract. Interestingly, the facts of SEC v. Turner are
similar to the case at bar. In Turner, the SEC brought a suit to enjoin
the violation of federal securities laws by a company offering to sell to the
public contracts characterized as self-improvement courses. On appeal from a
grant of preliminary injunction, the US Court of Appeals of the 9th
Circuit held that self-improvement contracts which primarily offered the buyer
the opportunity of earning commissions on the sale of contracts to others were
"investment contracts" and thus were "securities" within
the meaning of the federal securities laws. This is regardless of the fact that
buyers, in addition to investing money needed to purchase the contract, were
obliged to contribute their own efforts in finding prospects and bringing them
to sales meetings. The appellate court held:
It
is apparent from the record that what is sold is not of the usual
"business motivation" type of courses. Rather, the purchaser is
really buying the possibility of deriving money from the sale of the plans by
Dare to individuals whom the purchaser has brought to Dare. The promotional
aspects of the plan, such as seminars, films, and records, are aimed at
interesting others in the Plans. Their value for any other purpose is, to put
it mildly, minimal.
Once
an individual has purchased a Plan, he turns his efforts toward bringing others
into the organization, for which he will receive a part of what they pay. His
task is to bring prospective purchasers to "Adventure Meetings."
The business scheme of petitioner in the case at bar
is essentially similar. An investor enrolls in petitioner’s program by paying
US$234. This entitles him to recruit two (2) investors who pay US$234 each and
out of which amount he receives US$92. A minimum recruitment of four (4)
investors by these two (2) recruits, who then recruit at least two (2) each,
entitles the principal investor to US$184 and the pyramid goes on.
We reject petitioner’s claim that the payment of
US$234 is for the seminars on leverage marketing and not for any product.
Clearly, the trainings or seminars are merely designed to enhance petitioner’s
business of teaching its investors the know-how of its multi-level marketing
business. An investor enrolls under the scheme of petitioner to be entitled to
recruit other investors and to receive commissions from the investments of
those directly recruited by him. Under the scheme, the accumulated amount received
by the investor comes primarily from the efforts of his recruits.
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