Game When They Win; Investment When They Lose: SEC v. SG, Ltd.

Authors

• Todd M. Tippett, Southern Methodist University, Dedman School of Law

Abstract

Congress established the Securities Act of 1933 and the Securities Exchange Act of 1934 to protect citizens from fraud in a wide array of financial instruments, ranging from well-established investment vehicles such as stocks and bonds to the more elusive concept of the investment contract. The landmark case of SEC v. W.J. Howey Co. has long grounded judicial efforts in defining what is and what is not an investment contract. The various federal circuit courts struggle, however, with the applicability of one prong of the Howey test, namely the requirement of a "common enterprise," with no indication of an agreement on the horizon. Recently, in SEC v. SG, Ltd., the First Circuit ruled for the first time on this issue, adopting horizontal commonality as an appropriate test for examining the "common enterprise" element of the Howey test. Moreover, the circuit court ruled that the "virtual shares," allegedly offered as an entertainment commodity by a foreign entity operating a "virtual stock exchange" existing entirely in cyberspace, did fall under the authority of the Securities Exchange Commission (SEC) and were subject to its regulation as investment contracts. The First Circuit accurately applied the most appropriate standard in establishing the "common enterprise" element of the Howey test. The opinion fails, however, to make a convincing overall argument that these "virtual shares" are investment contracts rather than the simple game that the website represented itself to be.

Recommended Citation

Todd M. Tippett, Game When They Win; Investment When They Lose: SEC v. SG, Ltd., 7 Computer L. Rev. & Tech. J. 313 (2003)