What is an Investment Contract? What is the test to determine it? Is it required to be registered with the Securities and Exchange Commission prior to its sale or offer for sale or distribution to the public?

It 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.” (R.A. 8799)

The HOWEY TEST is the test established to determine whether a transaction falls within the scope of an investment contract. It requires that a person:

1. Makes an investment of money;

2. In a common enterprise;

3. With the expectation of profits;

4. To be derived primarily from the efforts of others.

x x x

“We therefore rule that 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. As an investment contract that is security under R.A. No. 8799, it must be registered with public respondent SEC, otherwise the SEC cannot protect the investing public from fraudulent securities. The strict regulation of securities is founded on the premise that the capital markets depend on the investing public’s level of confidence in the system. “(Power Homes Unlimited Corporation vs. Securities and Exchange Commission, G.R. No. 164182, February 26, 2008, [Puno, C.J.], citing US cases of SEC vs. W.J.Howey Co., and SEC vs. Glenn W. Turner Enterprises, Inc., et al)