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DXSynergy and the law: Does the 'Howey Test' apply?

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Posted by: Doro Ajani

Please be sure to read this thread first:
http://www.web-life.org/vb/t10614-.html

The following was posted in the Business Law notes section at DXPT, by the admin. An example of the 'Howey Test' applied to an online program, to determine if it was offering securities or not.
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Oh... as an interesting comparison 'closer to home'... are any of you familiar with PAS (the Prosperity Automated System) which was closed down by the SEC ?

Applying the Howey Test, this would be the result:

an investment of money has been made... YES. Individuals had to 'expense' money to obtain a PAS site. PAS claimed to handle the marketing of your own products/services largely for you, which you later learned was not the case. The limits on how the marketing was handled was largely not in the favor of the advertiser's site(s), but of the PAS system. In short, a system beyond the control of the advertiser was to be used to market the advertiser's sites by others with promises of consistent returns. No refund applicable upon failure of PAS to perform as promised.

in a common enterprise... absolutely. Commissions are commissions, but all wholesale payments went to PAS HQ in order to obtain copies of the sites. PAS used the majority of the incoming money to pay folks on phones, build onto their own program, and do other things that did not directly help the 'investor' get paid through any but the promised services. Again, affiliate system cannot count according to this point of law unless the relationship BETWEEN investors would warrant, which is unusual. The Case Law studies provided in the topic above are interesting studies of such matters.

I assumed the "risk capital test" applied here, as it was clear in the case of PAS: The risk capital test looks at whether the money being put to work in a given venture will be used to develop or acquire the business or enterprise in which the interest is offered. If that test is satisfied, then such interest is deemed to be a security (if the other 'prongs' of the test each would pass). PAS was very open about what it did with incoming money... build upon itself 'on behalf of all PAS Members.'

and the investor has the expectation of profits... Yes. The investors invested for the purpose of profits; that was the singular offer of the system. There were no real values applied to use of the system outside of this.

which profits are expected to arise solely, or substantially, from the efforts of the promoter or third party. ... Yes. PAS told you that they did your marketing for you, by and large. They had their own folks answer the phones, and required that all interested buyers must first call for an 'interview' of sorts. In short, 'they provided the leads, the support, etc.' You could get your own leads, but still, they would generally have to answer the phones and interview, etc.

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PAS... was a USA company. It took money for building its own systems; not for marketing your sites for you as they claimed. They were in control of the majority of the system and you only got involved with them specifically to 'participate in the profits' they were promising by way of co-op shares (mainly the leads were phony, which you bought).

The biggest difference, among many others, between PAS and the DXSystem is the 'common enterprise' concept.

PAS: investment in 'common enterprise' whereas the DXSystem is not an investment, nor is it into a 'common enterprise' (until we speak of DXBC involvement, which again, is under Vanuatu jurisdiction and not the SEC, and there is no requirement that USA or most other nations not work with Vanuatu).

That and the 4th (last) prong of the Howey Test.
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Best Regards, DXPT Administration

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Finally, just for clarification:

If ANY ONE of the 4 'prongs' of the Howey Test fails, then the matter is not considered a 'security', and therefore does not fall under SEC jurisdiction.

There are two other concepts, but only at the State level:

'risk capital' and 'economic reality'

These refer more to issues such as 'online gaming' and related... for instance, if a site claims to be a 'game' but operates like a security, but folks lose money due to theft, the owner is finding it very hard, anymore, to make the claim that 'gaming' is not to be considered a 'security' under SEC jurisdiction or by virtue of SEC joint-relations (case of SEC vs. SP, in Belize, which is a UK commonwealth and pegs its currency at a 2:1 ratio with the USD by mutual government agreement).

'Economic reality' emphasizes 'function over form', meaning a 'game' that acts like a 'security' should be seen as a 'security' by virtue of its operation and proclaimed promises or proclaimed actions on behalf of members.
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Best Regards, DXPT Administration


Posted by: Doro Ajani

http://en.wikipedia.org/wiki/Securi..._J._Howey_ Co.

Outline of the specifics of the case:

Quote:
Securities and Exchange Commission v. W. J. Howey Co., 328 U.S. 293 (1946), was a case in which the Supreme Court of the United States held that the offer of a land sales and service contract was and “investment contract” within in meaning of the Securities Act of 1933, 15 U.S.C. § 77b, and that the use of the mails and interstate commerce in the offer and sale of these securities was a violation of §5 of the Act, 15 U.S.C. § 77e. It was an important case in determining the general applicability of the federal securities laws....


Full text of the case:

http://caselaw.lp.findlaw.com/scrip...ol=328&page=293



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