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Power Vs SEC

The Supreme Court ruled that Power Homes Unlimited Corp's business scheme constituted an investment contract requiring registration with the SEC. [1] The scheme involved investors paying money to enroll and recruit additional investors, with the expectation of receiving commissions primarily from the efforts of those recruited. [2] This met the definition of an investment contract under the Howey Test. [3] As the business was not registered with the SEC, the issuance of a cease and desist order against Power Homes was proper.

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Janine Fabe
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1K views

Power Vs SEC

The Supreme Court ruled that Power Homes Unlimited Corp's business scheme constituted an investment contract requiring registration with the SEC. [1] The scheme involved investors paying money to enroll and recruit additional investors, with the expectation of receiving commissions primarily from the efforts of those recruited. [2] This met the definition of an investment contract under the Howey Test. [3] As the business was not registered with the SEC, the issuance of a cease and desist order against Power Homes was proper.

Uploaded by

Janine Fabe
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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POWER HOMES UNLIMITED CORP., vs. SEC, (G.R. No.

164182, February 26, 2008)

FACTS:

Petitioner is a domestic corporation duly registered with public respondent SEC. It


was engaged in managing real estate properties for subdivision & allied purposes and in
the purchase, exchange, and/or sale of such through network marketing. Manero &
Munsayac requested SEC to investigate petitioner’s business since he attended a
seminar conducted by Power Homes where the latter claimed to sell properties that were
inexistent and without any broker’s license & desires to know if network marketing is
legitimate. In compliance, petitioner submitted copies of its marketing course module and
letters of accreditation/authority or confirmation from Crown Asia, Fil-Estate Network and
Pioneer 29 Realty Corporation. Respondent thereafter found Power Homes to be
engaged in the sale or offer for sale or distribution of investment contracts, which are
considered securities under Sec. 3.1 (b) of R.A. No. 8799 (The Securities Regulation
Code), but failed to register them in violation of Sec. 8.1 of the same Act. SEC then issued
a Cease and Desist Order to petitioner to enjoin the latter from engaging in the sale, offer
or distribution of the securities. Aggrieved, petitioner went to the Court of Appeals imputing
grave abuse of discretion amounting to lack or excess of jurisdiction on public respondent
SEC for issuing the order. It also applied for a temporary restraining order

ISSUE: Whether or not the petitioners business constitutes an investment contract which
should be registered with public respondent SEC before its sale or offer for sale or
distribution to the public.

RULING:

Yes.

An investment contract is defined in the Amended Implementing Rules and


Regulations of R.A. No. 8799 as 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.

Under 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. 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. 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.
The court ruled that the business scheme of petitioner in the case at bar is
essentially similar. An investor enrolls in petitioners 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. It further reject the petitioners 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 petitioners 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.

Therefore, the business operation or the scheme of petitioner constitutes an


investment contract that is a security under R.A. No. 8799. Thus, it must be registered with
public respondent SEC before its sale or offer for sale or distribution to the public. As
petitioner failed to register the same, its offering to the public was rightfully enjoined by
public respondent SEC. The CDO was proper even without a finding of fraud.

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