Power Homes Unlimited Corp. v. SEC

G.R. No. 164182                                             February 26, 2008

Power Homes Unlimited Corp. vs. SEC

Nature: Corporation Law

Facts:

Power Homes (P) 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 (R) to investigate P’s business since he attended a seminar conducted by P where the latter claimed to sell properties that were inexistent and without any broker’s license & desires to know if network marketing is legitimate. P submitted to R copies of its marketing course module and letters of accreditation/authority or confirmation from Crown Asia, Fil-Estate Network and Pioneer 29 Realty Corporation after a conference held by R. R found P 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. R then issued a CDO to P to enjoin the latter from engaging in the sale, offer or distribution of the securities.

Issue:

Whether P’s business constitutes investment contracts which should be registered with R before its sale or offer for sale or distribution to the public.

Ruling:

Yes. The court ruled that P failed 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.

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. R.A. No. 8799 defines an Investment contract as a contract, transaction or scheme 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. In the case at bar, P’s business involves security contracts wherein an investor enrolls in P’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.

The trainings or seminars are merely designed to enhance P’s business of teaching its investors the know-how of its multi-level marketing business. An investor enrolls under the scheme of P 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.