ÿWPC! ãèœùœّ­Ø®Mý±7÷ÁlsÝ[A/Œ>"« †í*Ø1’×9Ì/IN)F\V‡stxt@–ÔœE©'àtÏâ¬uÕ¢y> ÆÊ *~ Jî}ùKU§øD˜¾ÃÇ÷Ž£wRïü¡Œ&!6&á„üI,4 èu9&ȸ¹ø‹~Vk¼Ûá\T¿ì;ñÿül»½M¤Ôy,(秉p<%æ0x‰D¦Œ„/ Ol¾XqÃiqì°ÐîÕsðè,vä4››‘#Sz“÷èy»¦róM\ "¨ð8z„Aœ o•ÙÂiòÌ©dçf!Ƭ»šE~ÑfQB•´±D×òMcÓ‰úµêh‹²ex¶+DAñêb^?&¦~ ¦Ò4Ùâ•TNeJÈ©á;Ê?w-³ïF.I7“Fžd‚CW¤%#i‡Óø÷¡VTnêfM "bB4BŠñïûÄFY/ðójâIp‚e>kÙI ¿Íg?ªgÛDY ²M6Ü\«L|Ó5«.~›1ý%fÞå)>+ðåœpîúõY’uTÃÓ …ó*Nï9E'$—ð;g¢ö_J¨f@>1ÇøÕ€l× fùù@#!€ %¡ 0 D§ 0(ë 0 ÆÞáâ¿ ^ ¡ w@­ 4í  mU F)boEwfya{1UFÀôUFúUN@NŽŽŽŽŽŽ “000öÃÃô¹¹ B­­­­­­­­­­­­­­­­­­­­U>ÊÊÊʘHP LaserJet 4,ü,,,,,ü0X(#Ã$òòÚ  Ú0Ú  Úóó($¡¡ (d:2ô9$¤¤Ý ƒ!ÝÝ  ÝÓ  ÓÓ=€ÂYXÐXdÐd=Óà  àÓÓòòÚ  Ú0Ú  Úóó ÔÝ ƒô9$ÝÓ  ÓÓ=€ÂYXÐXdÐd=Óà  àÓÓòòÚ  Ú4Ú  ÚóóÝ  ÝÔ_ÔSG€specifically€addressed€this€issue€on€its€website,Ð ° Ðdeclaring€that:€€"New€players:€€that€is€the€only€source€of€allÏfinancial€income€to€any€game.€€It€does€not€and€cannot€have€otherÏsources€of€income.€€Otherwise,€the€game€becomes€unprofitable€andÏtherefore€simply€pointless." ØÝ ƒô9$ÝÓ  ÓÓ=€ÂYXÐXdÐd=Óà  àÓÓòòÚ  Ú3Ú  ÚóóÝ  ÝÔ_ÔWhile€the€terms€"Ponzi"€and€"pyramid"€often€are€usedÐ ° Ðinterchangeably€to€describe€financial€arrangements€which€rob€PeterÏto€pay€Paul,€the€two€differ€slightly.€€In€Ponzi€schemes€ð"ðò òó ó€namedÐ \¬ Ðafter€a€notorious€Boston€swindler,€Charles€Ponzi,€who€parlayed€anÏinitial€stake€of€$150€into€a€fortune€by€means€of€an€elaborateÏscheme€featuring€promissory€notes€yielding€interest€at€annual€ratesÏof€up€to€50%€ð"ð€money€tendered€by€later€investors€is€used€to€pay€offÏearlier€investors.€€In€contrast,€pyramid€schemes€incorporate€aÏrecruiting€element;€they€are€marketing€arrangements€in€whichÏparticipants€are€rewarded€financially€based€upon€their€ability€toÏinduce€others€to€participate.€€The€SEC€alleges€that€SG's€operationsÏaptly€can€be€characterized€under€either€appellation.Ć-+Æ p Iq Dr es t Eu v ïw Ex y ïŒT%+6X€++3|xy  ÿU‹ÿÀÀÀÿ.Courier New Regular- ù-øÀTABLE A 'Ý ƒô9$ÝÓ  ÓÓ=€ÂYXÐXdÐd=Óà  àÓÓòòÚ  Ú5Ú  ÚóóÝ  ÝÔ_ÔAs€the€SEC€points€out,€SG€specifically€represented€on€itsÐ ° Ðwebsite€that€SG€was€òònotóó€a€pyramid€scheme€that€would€"collapseÐ †Ö Ðinevitably€as€soon€as€the€inflow€of€new€players€stops."€€It€went€onÏto€state:Ìà8  àà8` Ð Ð àThis€is€not€a€pyramid.€€The€similarities€areÏpurely€superficial€here.€€A€whale€might€lookÏlike€a€fish,€but€there€are€millions€of€yearsÏof€evolution€between€the€two.€€The€mainÏfundamental€difference€is€the€lack€of€criticalÏpoints€in€time,€namely€those€of€mass€payments.€ÏBy€manipulating€profit,€an€optimal€way€ofÏspreading€them€in€time€is€successfully€found.<4šÛ 9Z+‹.Courier New Regular êÝ ƒ©9$ÝÓ  ÓÓ=€rcXÐXdÐd=Óà  àÓÓòòÚ  Ú1Ú  ÚóóÝ  ÝÔ_ÔWe€note€that€broad€vertical€commonality€is€an€expansiveÐ ° Ðconcept€which€typically€overspreads€other€types€of€commonality.€ÏòòSeeóó€òòMordauntóó€v.€òòÔ_ÔIncomcoÔ_Ôóó,€469€U.S.€1115,€1115„16€(1985)€(White,€J.,Ð \¬ Ðdissenting€from€denial€of€certiorari).ÿ.Courier New Regular(ÈhH  Z6Times New Roman Regular –Ý ƒô9$ÝÓ  ÓÓ=€ÂYXÐXdÐd=Óà  àÓÓòòÚ  Ú7Ú  ÚóóÝ  ÝÔ_ÔThe€Court€reiterated€this€conclusion€in€dismissing€theÐ ° Ðpossibility€that€the€co„op€would€lease€commercial€facilities,Ïprofessional€offices,€parking€spaces,€and€communal€washingÏmachines.€€Noting€that€the€Information€Bulletin€made€no€referenceÏto€the€prospect€of€any€such€income€as€a€means€of€offsetting€rentalÏcosts,€the€Court€concluded€"that€investors€were€not€attracted€toÏCo„op€City€by€the€offer€of€these€potential€rental€reductions."€ÏòòFormanóó,€421€U.S.€at€856. ‰Ý ƒô9$ÝÓ  ÓÓ=€ÂYXÐXdÐd=Óà  àÓÓòòÚ  Ú8Ú  ÚóóÝ  ÝÔ_ÔWe€caution,€however,€that€the€òòFormanóó€òòóóCourt€explicitlyÐ ° Ðreserved€judgment€on€adoption€of€the€òòTurner€EnterprisesóóÐ †Ö Ðformulation.€€òòSeeóó€òòóó421€U.S.€at€852€n.16. ìÝ ƒô9$ÝÓ  ÓÓ=€ÂYXÐXdÐd=Óà  àÓÓòòÚ  Ú2Ú  ÚóóÝ  ÝÔ_ÔSince€the€complaint€in€this€case€alleges€facts€sufficient€toÐ ° Ðestablish€horizontal€commonality,€òòseeóó€òòinfraóó€Part€III(B)(2),€we€takeÐ †Ö Ðno€view€as€to€whether€vertical€commonality,€in€either€of€itsÏiterations,€also€may€suffice€to€satisfy€the€"common€enterprise"Ïrequirement. êÝ ƒô9$ÝÓ  ÓÓ=€ÂYXÐXdÐd=Óà  àÓÓòòÚ  Ú1Ú  ÚóóÝ  ÝÔ_ÔWe€note€that€broad€vertical€commonality€is€an€expansiveÐ ° Ðconcept€which€typically€overspreads€other€types€of€commonality.€ÏòòSeeóó€òòMordauntóó€v.€òòÔ_ÔIncomcoÔ_Ôóó,€469€U.S.€1115,€1115„16€(1985)€(White,€J.,Ð \¬ Ðdissenting€from€denial€of€certiorari). d&Courier Regular öÝ ƒô9$ÝÓ  ÓÓ=€ÂYXÐXdÐd=Óà  àÓÓòòÚ  Ú6Ú  ÚóóÝ  ÝÔ_ÔIf€more€were€needed€ð"ð€and€we€doubt€that€it€is€ð"ð€SG's€promiseÐ ° Ðto€divert€a€portion€of€profits€from€website€operations€to€supportÏshare€prices€if€the€need€arose€also€warrants€a€finding€ofÏhorizontal€commonality.€€Through€this€arrangement,€SG€providedÐ 2‚ € Ðparticipants€with€the€opportunity€to€share€income€derived€fromÏwebsite€operations€on€a€pro€rata€basis.€€The€SEC's€complaint€notesÏthese€facts€and€alleges€in€substance€that€a€percentage€ofÏparticipants'€funds€were€pooled;€that€participants€were€told€ofÏtheir€entitlement€to€support€from€this€monetary€pool;€and€that€theyÏcollectively€stood€to€gain€or€lose€(depending€on€whether€theyÏreceived€the€guaranteed€return€on€their€shares).€€In€and€ofÏthemselves,€these€averred€facts€boost€the€SEC€across€the€legalÏthreshold€for€horizontal€commonality.Ý ƒ!ÝÝ  ÝÔ_ÔÑTRXà3Ø'Xà3Ø' Letter3Ø' Letterÿ3Ø'TÑÑ ? ÑÙ*ƒ !Ùò òÓ  ÓÓ  ÓÔ‡°yJ°XXÔÔ‡°S °°°yJÔUnited€States€Court€of€AppealsÐ ° ÐÔ#†X¤˜X°°S Å#ÔÔ‡„7þ„XX¤˜ÔFor€the€First€CircuitÔ#†X¤˜X„„7þY#ÔÔ#†XÂsXXX¤˜ä#Ôó óÐ à ÐÓ¹ÓÌÌßA€') °°` dE<£ ` AßÐ ¤ ô ÐÌNos.€01„1176Ì€€€€€01„1332Ìà@¸ ¸ ìàSECURITIES€AND€EXCHANGE€COMMISSION,ˆÌÌà@ ìàPlaintiff,€Appellant,ˆÌÌà@tt)ìàv.ˆÌÌà@hh#ìàSG€LTD.€ET€AL.,ˆÌÌà@ÄÄìàDefendants,€Appellees.ˆÌÌßA€') °°` dE<` AßÐ ‘á ÐÌà@` ` ìàAPPEALS€FROM€THE€UNITED€STATES€DISTRICT€COURTˆÌÌà@0 0 ìàFOR€THE€DISTRICT€OF€MASSACHUSETTSˆÌÌà@Ø Ø ìà[Hon.€Joseph€L.€Ô_ÔTauroÔ_Ô,€òòU.S.€District€Judgeóó]ˆÐ Î ÐÌßA€') °°` dE<y` AßÐ zÊ ÐÌà@„„'ìàBeforeˆÌÓ  ÓÌà@@((ìà€Boudin,€òòChief€Judgeóó,Ð  [ ÐÌSelya€and€Lipez,€òòCircuit€Judgesóó.Ð ·  ÐÌßA€') °°` dE<b ` AßÐ c ³" ÐÌÓ  ÓÓ  Óà  àòòMark€Ô_ÔPenningtonÔ_Ôóó,€Assistant€General€Counsel,€with€whom€òòDavid€M.Ð H!˜$ ÐBeckeróó,€General€Counsel,€òòJacob€H.€Ô_ÔStillmanÔ_Ôóó,€Solicitor,€and€òòMeyerÐ "n% ÐÔ_ÔEisenbergÔ_Ôóó,€Deputy€General€Counsel,€were€on€brief,€for€appellant.Ð ô"D& Ðà  àòòDaniel€I.€Smallóó,€with€whom€òòÔ_ÔMeaghanÔ_Ô€E.€Barrettóó€and€òòButters,Ð Ê#' ÐBrazilian€&€Small,€Ô_ÔLLPÔ_Ôóó€were€on€brief,€for€appellees.Ð  $ð( ÐÌÌÔ*‹ƒ'ddd Xdd Xdd X°(#°(#‹ÔÔ,( dd ÔÔ,( dd ÔÔ,( dd ÔÔ+  ÔÐ  "'r"+ ‹‹ÐÓßÓñv ññy ñÐ SI†'Ö", @#â@37146„„‰@#â@‰‹‹SÐñy ññy ñÐ SI†'Ö",  #â@37145„„‰ #â@‰‹‹SÐñy ñÔ_Ôñv ññv ñÐ 0&†'Ö", „„‹‹0Ðñv ñÌñs ñSeptember€1ñs ññw ññs ñ2ñs ññw ññx ñ3ñx ññs ñ,€2ñs ññt ññs ñ„ñs ññt ññu ñ001ñu ñÌÔ_ÔÐ SID2)‚$/" @#â@37146 @#â@ ‹‹SÐÐ(†'Ö"0  (ÐÓ  ÓÙ* !ÙÌÌÓ  ÓÌÐ  º, (3? ÐÔ_ÔÑ  ÑÓÓÑ8€;¤ö;X XdÈXXdÖ8ÑÑ€ÑÓ*°,X°` ¨ ƒX°œX*Óà ` àò òSELYA,€òòCircuit€Judgeóó.ó ó€€These€appeals€ð"ð€procedurally,Ð ° Ðthere€are€two,€but€for€all€practical€purposes€they€may€be€treatedÏas€one€ð"ð€require€us€to€determine€whether€virtual€shares€in€anÏenterprise€existing€only€in€cyberspace€fall€within€the€purview€ofÏthe€federal€securities€laws.€€SG€Ltd.,€a€Dominican€corporation,€andÏits€affiliate,€SG€Trading€Ltd.€(collectively,€"SG"€orÏ"defendants"),€asseverate€that€the€virtual€shares€were€part€of€aÏfantasy€investment€game€created€for€the€personal€entertainment€ofÏInternet€users,€and€therefore,€that€those€shares€do€not€implicateÏthe€federal€securities€laws.€€The€Securities€and€ExchangeÏCommission€("the€SEC"),€plaintiff€below€and€appellant€here,Ïcounters€that€substance€ought€to€prevail€over€form,€and€that€merelyÏlabeling€a€website€as€a€game€should€not€negate€the€applicability€ofÏthe€securities€laws.€€The€district€court€accepted€the€defendants'Ïview€and€dismissed€the€SEC's€complaint.€€òòSECóó€v.€òòSG€Ltd.óó,€142€F.Ð 4„ ÐSupp.€2d€126€(D.€Mass.€2001).€€Concluding,€as€we€do,€that€the€SECÏalleged€sufficient€facts€to€state€a€triable€claim,€we€reverse.Ìò òI.€€BACKGROUNDó óÐ 8!ˆ" Ðà ` àWe€take€the€facts€as€alleged€in€the€SEC's€first€amendedÏcomplaint€(shorn,€however,€of€empty€rhetoric).€€òòAulsonóó€v.Ð ¬$ü& ÐòòBlanchardóó,€83€F.3d€1,€3€(1st€Cir.€1996).Ð X&¨!( Ðà ` àThe€underlying€litigation€was€spawned€by€SG's€operationÏof€a€"StockGeneration"€website€offering€on„line€denizens€anÏopportunity€to€purchase€shares€in€eleven€different€"virtualÐ \+¬&. Ðcompanies"€listed€on€the€website's€"virtual€stock€exchange."€€SGÏarbitrarily€set€the€purchase€and€sale€prices€of€each€of€theseÏimaginary€companies€in€biweekly€"rounds,"€and€guaranteed€thatÏinvestors€could€buy€or€sell€any€quantity€of€shares€at€postedÏprices.€€SG€placed€no€upper€limit€on€the€amount€of€funds€that€anÏinvestor€could€squirrel€away€in€its€virtual€offerings.Ìà ` àThe€SEC's€complaint€focused€on€shares€in€a€particularÏvirtual€enterprise€referred€to€by€SG€as€the€"privileged€company,"Ïand€so€do€we.€€SG€advised€potential€purchasers€to€pay€"particularÏattention"€to€shares€in€the€privileged€company€and€boasted€thatÏinvesting€in€those€shares€was€a€"game€without€any€risk."€€To€thisÏend,€its€website€announced€that€the€privileged€company's€sharesÏwould€unfailingly€appreciate,€boldly€proclaiming€that€"[t]he€shareÏprice€of€[the€privileged€company]€is€supported€by€the€owners€of€SG,Ïthis€is€why€its€value€constantly€rises;€on€average€at€a€rate€of€10%Ïmonthly€(this€is€approximately€215%€annually)."€€To€addÏplausibility€to€this€representation€and€to€allay€anxiety€aboutÏfuture€pricing,€SG€published€prices€of€the€privileged€company'sÏshares€one€month€in€advance.Ìà ` àWhile€SG€conceded€that€a€decline€in€the€share€price€wasÏtheoretically€possible,€it€assured€prospective€participants€thatÏ"under€the€rules€governing€the€fall€in€prices,€[the€share€price€forÏthe€privileged€company]€cannot€fall€by€more€than€5%€in€a€round."€ÏTo€bolster€this€claim,€it€vouchsafed€that€shares€in€the€privilegedÐ $+t&. Ðcompany€were€supported€by€several€distinct€revenue€streams.€ÏAccording€to€SG's€representations,€capital€inflow€from€newÏparticipants€provided€liquidity€for€existing€participants€who€mightÏchoose€to€sell€their€virtual€shareholdings.€€As€a€backstop,€SGÏpledged€to€allocate€an€indeterminate€portion€of€the€profits€derivedÏfrom€its€website€operations€to€a€special€reserve€fund€designed€toÏmaintain€the€price€of€the€privileged€company's€shares.€€SG€assertedÏthat€these€profits€emanated€from€four€sources:€€(1)€the€collectionÏof€a€1.5%€commission€on€each€transaction€conducted€on€its€virtualÏstock€exchange;€(2)€the€bid„ask€spread€on€the€virtual€shares;€(3)Ïthe€"skillful€manipulation"€of€the€share€prices€of€eight€particularÏimaginary€companies,€not€including€the€privileged€company,€listedÏon€the€virtual€stock€exchange;€and€(4)€SG's€right€to€sell€shares€ofÏthree€other€virtual€companies€(including€the€privileged€company).€ÏAs€a€further€hedge€against€adversity,€SG€alluded€to€theÏavailability€of€auxiliary€stabilization€funds€which€could€be€tappedÏto€ensure€the€continued€operation€of€its€virtual€stock€exchange.Ìà ` àSG's€website€contained€lists€of€purported€"big€winners,"Ïan€Internet€bulletin€board€featuring€testimonials€from€supposedlyÏsatisfied€participants,€and€descriptions€of€incentive€programs€thatÏheld€out€the€prospect€of€rewards€for€such€activities€as€theÏreferral€of€new€participants€(e.g.,€SG's€representation€that€itÏwould€pay€"20,€25€or€30%€of€the€referred€player's€highest€of€theÏfirst€three€payments")€and€the€establishment€of€affiliate€websites.Ð $+t&. Ðà ` àAt€least€800€United€States€domiciliaries,€paying€realÏcash,€purchased€virtual€shares€in€the€virtual€companies€listed€onÏthe€defendants'€virtual€stock€exchange.€€In€the€fall€of€1999,€overÏ$4,700,000€in€participants'€funds€was€deposited€into€a€Latvian€bankÏaccount€in€the€name€of€SG€Trading€Ltd.€€The€following€spring,€moreÏthan€$2,700,000€was€deposited€in€Estonian€bank€accounts€standing€inÏthe€names€of€SG€Ltd.€and€SG€Perfect€Ltd.,€respectively.Ìà ` àIn€late€1999,€participants€began€to€experienceÏdifficulties€in€redeeming€their€virtual€shares.€€On€March€20,€2000,Ïthese€difficulties€crested;€SG€unilaterally€suspended€all€pendingÏrequests€to€withdraw€funds€and€sharply€reduced€participants'Ïaccount€balances€in€all€companies€except€the€privileged€company.€ÏTwo€weeks€later,€SG€peremptorily€announced€a€reverse€stock€split,Ïwhich€caused€the€share€prices€of€all€companies€listed€on€theÏvirtual€stock€exchange,€including€the€privileged€company,€toÏplummet€to€1/10,000€of€their€previous€values.€€At€about€the€sameÏtime,€SG€stopped€responding€to€participant€requests€for€the€returnÏof€funds,€yet€continued€to€solicit€new€participants€through€itsÏwebsite.Ìà ` àThe€SEC€undertook€an€investigation€into€SG's€activities,Ïwhich€culminated€in€the€filing€of€a€civil€action€in€federalÏdistrict€court.€€The€SEC's€complaint€alleged,€in€substance,€thatÏSG's€operations€constituted€a€fraudulent€scheme€in€violation€of€theÏregistration€and€antifraud€provisions€of€the€federal€securitiesÐ $+t&. Ðlaws.€€òòSeeóó€Securities€Act€of€1933€ðð€5(a),€(c),€15€U.S.C.€ðð€77e(a),Ð ° Ð(c)€(offer,€sale,€or€delivery€of€unregistered€securities);€òòid.óó€ððÐ \¬ Ð17(a),€15€U.S.C.€ðð€77q(a)€(fraud€in€offer€or€sale€of€securities);€ÏSecurities€Exchange€Act€of€1934€ðð€10(b),€15€U.S.C.€ðð€78j(b);€SECÏRule€10b„5,€17€C.F.R.€240.10b„5€(fraud€in€connection€with€purchaseÏor€sale€of€securities).€€ò òó óThe€SEC€sought€injunctive€relief,Ð  \  Ðdisgorgement,€and€civil€penalties.Ìà ` àThe€district€court€entered€a€temporary€restraining€orderÏ(subsequently€converted€to€a€preliminary€injunction)€blocking€SG'sÏoperation€of€the€website€òòpendenteóó€òòliteóó.€€The€court€also€institutedÐ ¼  Ðan€asset€freeze€that€infrigidated€approximately€$5,500,000.€€TheÏSEC's€success€was€short„lived;€after€some€skirmishing,€not€relevantÏhere,€the€district€court€granted€SG's€motion€to€dismiss€theÏcomplaint€for€failure€to€state€a€cognizable€claim€on€the€groundÏthat€the€virtual€shares€were€a€clearly€marked€and€defined€gameÏlacking€a€business€context.€€òòSeeóó€òòSECóó€v.€òòSG€Ltd.óó,€142€F.€Supp.€2d€atÐ Ä Ð131.€€The€SEC€immediately€appealed,€and€we€issued€a€stay€keepingÏboth€the€preliminary€injunction€and€the€asset€freeze€in€place€forÏthe€time€being.Ìà ` àThese€appeals€hinge€on€whether€the€district€court€erredÏin€ruling€that€transactions€in€the€privileged€company's€shares€didÏnot€constitute€transactions€in€securities.€€In€the€pages€thatÏfollow,€we€explore€the€makeup€of€that€particular€type€of€securityÏknown€as€an€investment€contract;€examine€the€district€court'sÐ $+t&. Ðrationale;€and€apply€the€tripartite€"investment€contract"€test€toÏthe€facts€as€alleged.€€Because€the€lower€court€dismissed€the€SEC'sÏfirst€amended€complaint€for€failure€to€state€a€claim€upon€whichÏrelief€might€be€granted,òòóó€Fed.€R.€Civ.€P.€12(b)(6),€we€conduct€a€deÐ ´  Ðnovo€review,€"accepting€as€true€all€well„pleaded€factual€avermentsÏand€indulging€all€reasonable€inferences€in€the€plaintiff's€favor."€ÏòòAulsonóó,€83€F.3d€at€3.€€If€the€facts€contained€in€the€complaint,Ð ¸  Ðviewed€in€this€favorable€light,€justify€recovery€under€anyÏapplicable€legal€theory,€we€must€set€aside€the€order€of€dismissal.€ÏòòConleyóó€v.€òòGibsonóó,€355€U.S.€41,€45„46€(1957);€òòAulsonóó,€83€F.3d€at€3.Ð ¼  Ðò òII.€€THE€LEGAL€LANDSCAPEó óÐ h¸ Ðà ` àThese€appeals€turn€on€whether€the€SEC€alleged€factsÏwhich,€if€proven,€would€bring€this€case€within€the€jurisdictionalÏambit€of€the€federal€securities€laws.€€Consequently,€we€focus€onÏthe€type€of€security€that€the€SEC€alleges€is€apposite€here:€Ïinvestment€contracts.Ìà@ìàò òA.€€òòInvestment€Contractsóó.ó óˆÐ ŒÜ  Ðà ` àThe€applicable€regulatory€regime€rests€on€twoÏcomplementary€pillars:€€the€Securities€Act€of€1933,€15€U.S.C.€ððððÏ77a„77aa,€and€the€Securities€Exchange€Act€of€1934,€15€U.S.C.€ððððÏ78a„78mm.€€These€statutes€employ€nearly€identical€definitions€ofÏthe€term€"security."€€òòSeeóó€Securities€Act€of€1933€ðð€2(a)(1),€15Ð (T#* ÐU.S.C.€ðð€77b(a)(1);€Securities€Exchange€Act€of€1934€ðð€3(a)(10),€15ÏU.S.C.€ðð€78c(a)(10).€€Congress€intended€these€sweeping€definitions,Ð \+¬&. Ðset€forth€in€an€appendix€hereto,€to€encompass€a€wide€array€ofÏfinancial€instruments,€ranging€from€well„established€investmentÏvehicles€(e.g.,€stocks€and€bonds)€to€much€more€arcane€arrangements.€ÏòòSECóó€v.€òòC.€M.€Joiner€Leasing€Corp.óó,€320€U.S.€344,€351€(1943).ò òó ó€Ð ´  ÐIncluded€in€this€array€is€the€elusive,€essentially€protean,€conceptÏof€an€investment€contract.Ìà ` àJudicial€efforts€to€delineate€what€is€ð"ð€and€what€is€notÏð"ð€an€investment€contract€are€grounded€in€the€seminal€case€of€òòSECóó€v.Ð d´  ÐòòW.€J.€Howey€Co.óó,€328€U.S.€293€(1946).€€The€òòHoweyóó€Court€establishedÐ `  Ða€tripartite€test€to€determine€whether€a€particular€financialÏinstrument€constitutes€an€investment€contract€(and,€hence,€aÏsecurity).€€This€test€has€proven€durable.€€Under€it,€an€investmentÏcontract€comprises€(1)€the€investment€of€money€(2)€in€a€commonÏenterprise€(3)€with€an€expectation€of€profits€to€be€derived€solelyÏfrom€the€efforts€of€the€promoter€or€a€third€party.€€òòId.óó€at€298„99.€Ð h ÐThis€formulation€must€be€applied€in€light€of€the€economic€realitiesÏof€the€transaction.€€òòUnited€Hous.€Found.,€Inc.óó€v.€òòFormanóó,€421€U.S.Ð pÀ  Ð837,€851„52€(1975);òòóó€òòTcherepninóó€v.€òòKnightóó,€389€U.S.€332,€336€(1967);Ð !l" ÐòòFutura€Dev.€Corp.óó€v.€òòCentex€Corp.óó,€761€F.2d€33,€39€(1st€Cir.€1985).€Ð È"$ ÐIn€other€words,ÌÓÓà8 ` àsubstance€governs€form,€and€the€substance€ofÏan€investment€contract€is€a€security„likeÏinterest€in€a€"common€enterprise"€that,Ïthrough€the€efforts€of€the€promoter€or€others,Ïis€expected€to€generate€profits€for€theÏsecurity€holder,€either€for€directÏdistribution€or€as€an€increase€in€the€value€ofÏthe€investment.Ðú+J'/` x` x ЇÓÓòòRodriguezóó€v.€òòBanco€Cent.€Corp.óó,€990€F.2d€7,€10€(1st€Cir.€1993)Ð ° Ð(citations€omitted).Ìà ` àThe€òòóóSupreme€Court€has€long€espoused€a€broad€constructionÐ X Ðof€what€constitutes€an€investment€contract,€aspiring€"to€afford€theÏinvesting€public€a€full€measure€of€protection."€€òòHoweyóó,€328€U.S.€atÐ ` ° Ð298.€€The€investment€contract€taxonomy€thus€"embodies€a€flexibleÏrather€than€a€static€principle,€one€that€is€capable€of€adaptationÏto€meet€the€countless€and€variable€schemes€devised€by€those€whoÏseek€the€use€of€the€money€of€others€on€the€promise€of€profits."€ÏòòId.óó€at€299.Ð ¼  Ðà ` àThe€òòHoweyóó€test€has€proven€to€be€versatile€in€practice.€Ð h¸ ÐOver€time,€courts€have€classified€as€investment€contracts€aÏkaleidoscopic€assortment€of€pecuniary€arrangements€that€defyÏcategorization€in€conventional€financial€terms,€yet€nonethelessÏsatisfy€the€òòHoweyóó€Court's€three€criteria.€€òòSeeóó,€òòe.g.óó,€òòid.óó€(holdingÐ h Ðthat€sale€of€citrus€groves,€in€conjunction€with€service€contract,Ïqualifies€as€an€investment€contract);€òòTeagueóó€v.€òòBakkeróó,€35€F.3dÐ pÀ  Ð978,€981,€990€(4th€Cir.€1994)€(same€re€purchase€of€life€partnershipÏin€evangelical€community);€òòLongóó€v.€òòShultz€Cattle€Co.óó,€881€F.2d€129,Ð È"$ Ð132€(5th€Cir.€1989)€(same€re€cattle„feeding€and€consultingÏagreement);€òòMilleróó€v.€òòCent.€Chinchilla€Groupóó,€494€F.2d€414,€415,Ð  &p!( Ð418€(8th€Cir.€1974)€(same€re€chinchilla€breeding€and€resaleÏarrangement).ÌÐ $+t&. Ðà@¸ ¸ ìàò òB.€€òòThe€District€Court's€Rationaleóó.ó óˆÐ ° Ðà ` àWe€pause€at€this€juncture€to€address€the€district€court'sÏrationale.€€Relying€upon€a€dictum€from€òòHoweyóó€discussing€"the€manyÐ $t Ðtypes€of€instruments€that€in€our€commercial€world€fall€within€theÏordinary€concept€of€a€security,"€328€U.S.€at€299€(quotingÏlegislative€history),€the€district€court€drew€a€distinction€betweenÏwhat€it€termed€"commercial€dealings"€and€what€it€termed€"games."€òòóóÐ Ô$  ÐòòSECóó€v.€òòSG€Ltd.óó,€142€F.€Supp.€2d€at€131.€€Characterizing€purchasesÐ €Ð  Ðof€the€privileged€company's€shares€as€a€"clearly€marked€and€definedÏgame,"€the€court€concluded€that€since€that€activity€was€not€part€ofÏthe€commercial€world,€it€fell€beyond€the€jurisdictional€reach€ofÏthe€federal€securities€laws.€€òòId.óó€€In€so€ruling,€the€courtÐ 0€ Ðdifferentiated€SG's€operations€from€a€classic€Ponzi€or€pyramidÏscheme€on€the€ground€that€those€types€of€chicanery€involvedÏcommercial€dealings€within€a€business€context.€€òòId.óóÐ 4„ Ðà ` àWe€do€not€gainsay€the€obvious€correctness€of€the€districtÏcourt's€observation€that€investment€contracts€lie€within€theÏcommercial€world.€€Contrary€to€the€district€court's€view,€however,Ïthis€locution€does€not€translate€into€a€dichotomy€between€businessÏdealings,€on€the€one€hand,€and€games,€on€the€other€hand,€as€aÏfailsafe€way€for€determining€whether€a€particular€financialÏarrangement€should€(or€should€not)€be€characterized€as€anÏinvestment€contract.€€òòHoweyóó€remains€the€touchstone€for€ascertainingÐ ”)ä$, Ðwhether€an€investment€contract€exists€ð"ð€and€the€test€that€itÐ @+&. Ðprescribes€must€be€administered€without€regard€to€nomenclature.€ÏòòSeeóó€òòInt'l€Bhd.€of€Teamstersóó€v.€òòDanielóó,€439€U.S.€551,€561€(1979);Ð \¬ Ðòòseeóó€òòalsoóó€òòFormanóó,€421€U.S.€at€851„52€(warning€against€reliance€onÐ X Ð"the€names€that€may€have€been€employed€by€the€parties"€to€identifyÏa€particular€investment);€òòcf.óó€William€Shakespeare,€òòRomeo€&€Julietóó,Ð ` ° Ðact€2,€sc.€2€(circa€1597)€("A€rose€by€any€other€name€would€smell€asÏsweet.").€€As€long€as€the€three„pronged€òòHoweyóó€testòòóó€is€satisfied,Ð ¸  Ðthe€instrument€must€be€classified€as€an€investment€contract.€ÏòòHoweyóó,€328€U.S.€at€301.€€Once€that€has€occurred,€"it€is€immaterialÐ `  Ðwhether€the€enterprise€is€speculative€or€non„speculative€or€whetherÏthere€is€a€sale€of€property€with€or€without€intrinsic€value."€€òòId.óó€Ð h¸ ÐIt€is€equally€immaterial€whether€the€promoter€depicts€theÏenterprise€as€a€serious€commercial€venture€or€dubs€it€a€game.Ìà ` àA€fairly€recent€Supreme€Court€opinion€demonstrates€thatÏthe€"commercial€world"€to€which€the€òòHoweyóó€Court€alluded€actuallyÐ h Ðencompasses€the€total€universe€of€financial€instruments€availableÏto€investors,€rather€than€the€subset€of€financial€instrumentsÏenvisioned€by€the€district€court€(i.e.,€"commerce"€as€opposed€toÏ"games").€€In€that€case,€Justice€Marshall€wrote:ÌÓÓà8 ` àIn€defining€the€scope€of€the€market€that€itÏwished€to€regulate,€Congress€painted€with€aÏbroad€brush.€€It€recognized€the€virtuallyÏlimitless€scope€of€human€ingenuity,€especiallyÏin€the€creation€of€"countless€and€variableÏschemes€devised€by€those€who€seek€the€use€ofÏthe€money€of€others€on€the€promise€ofÏprofits,"€and€determined€that€the€best€way€toÏachieve€its€goal€of€protecting€investors€wasÏ"to€define€'the€term€"security"€inÐ ú+J'/ Ðsufficiently€broad€and€general€terms€so€as€toÏinclude€within€that€definition€the€many€typesÏof€instruments€that€in€our€commercial€worldÏfall€within€the€ordinary€concept€of€aÏsecurity.'"€€Congress€therefore€did€notÏattempt€precisely€to€cabin€the€scope€of€theÏSecurities€Acts.€€Rather,€it€enacted€aÏdefinition€of€"security"€sufficiently€broad€toÏencompass€virtually€any€instrument€that€mightÏbe€sold€as€an€investment.Ð ` x` x ÐÌÓÓòòRevesóó€v.€òòErnst€&€Youngóó,€494€U.S.€56,€60„61€(1990)€(citationsÐ â 2  Ðomitted).€€This€expansive€language,€coupled€with€Congress'sÏsweeping€definitions€of€"security,"€persuade€us€to€reject€theÏdistrict€court's€use€of€òòHoweyóó's€"commercial€world"€reference€as€aÐ æ6 Ðlimiting€principle.Ìà ` àTo€sum€up,€òòHoweyóó€supplies€the€appropriate€template€forÐ >Ž Ðidentifying€investment€contracts€within€the€overarching€ambit€ofÏthe€federal€securities€laws.€€Contrary€to€the€district€court'sÏconclusion,€this€template€admits€of€no€exception€for€games€orÏgaming.€€Thus,€the€language€on€SG's€website€emphasizing€the€game„¼like€nature€of€buying€and€selling€virtual€shares€of€the€privilegedÏcompany€does€not€place€such€transactions€beyond€the€long€reach€ofÏthe€federal€securities€laws.Ìò òIII.€€ADMINISTERING€THE€TRIPARTITE€TESTó óÐ ž#î% Ðà ` àWhat€remains€is€to€analyze€whether€purchases€of€theÏprivileged€company's€shares€constitute€investment€contracts.€€WeÏturn€to€that€task,€taking€the€three€òòHoweyóó€criteria€in€sequence.Ð ¾($+ ÐÌÐ ,f'/ Ðà@LLìàò òA.€€òòInvestment€of€Moneyóó.ó óˆÐ ° Ðà ` àThe€first€component€of€the€òòHoweyóó€test€focuses€on€theÐ xÈ Ðinvestment€of€money.€€The€determining€factor€is€whether€an€investorÏ"chose€to€give€up€a€specific€consideration€in€return€for€aÏseparable€financial€interest€with€the€characteristics€of€aÏsecurity."€€òòDanielóó,€439€U.S.€at€559.€€We€conclude€that€the€SEC'sÐ ( x  Ðcomplaint€sufficiently€alleges€the€existence€of€this€factor.Ìà ` àTo€be€sure,€SG€disputes€the€point.€€It€argues€that€theÏindividuals€who€purchased€shares€in€the€privileged€company€were€notÏso€much€investing€money€in€return€for€rights€in€the€virtual€sharesÏas€paying€for€an€entertainment€commodity€(the€opportunity€to€playÏthe€StockGeneration€game).€€This€argument€suggests€that€anÏinteresting€factual€issue€may€await€resolution€ð"ð€whetherÏparticipants€were€motivated€primarily€by€a€perceived€investmentÏopportunity€or€by€the€visceral€excitement€of€playing€a€game.€ÏNevertheless,€this€case€comes€to€us€following€a€dismissal€underÏRule€12(b)(6),€and€the€SEC's€complaint€memorializes,€inter€alia,ÏSG's€representation€that€participants€could€"firmly€expect€a€10%Ïprofit€monthly"€on€purchases€of€the€privileged€company's€shares.€ÏThat€representation€plainly€supports€the€SEC's€legal€claim€thatÏparticipants€who€invested€substantial€amounts€of€money€in€exchangeÏfor€virtual€shares€in€the€privileged€company€likely€did€so€inÏâ âanticipation€of€investment€gains.€€Given€the€procedural€posture€ofÐ ”)ä$, Ðthe€case,€no€more€is€exigible€to€fulfill€the€first€part€of€theÏòòHoweyóó€test.Ð \¬ Ðâ âà@ÄÄìàò òB.€€òòCommon€Enterpriseóó.ó óˆÐ X Ðà ` àThe€second€component€of€the€òòHoweyóó€test€involves€theÐ Ð  Ðexistence€of€a€common€enterprise.€€Before€diving€headlong€into€theÏsea€of€facts,€we€must€dispel€the€miasma€that€surrounds€theÏappropriate€legal€standard.Ìà ` àò ò1.€€òòThe€Legal€Standardóó.ó ó€€Courts€are€in€some€disarray€asÐ €Ð  Ðto€the€legal€rules€associated€with€the€ascertainment€of€a€commonÏenterprise.€€òòSeeóó€òògenerallyóó€II€Louis€Loss€&€Joel€Seligman,Ð ôD ÐòòSecurities€Regulationóó€989„97€(3d€ed.€rev.€1999).ò òó ó€€Many€courtsÐ  ð Ðrequire€a€showing€of€horizontal€commonality€ð"ð€a€type€of€commonalityÏthat€involves€the€pooling€of€assets€from€multiple€investors€so€thatÏall€share€in€the€profits€and€risks€of€the€enterprise.€€òòSeeóó€òòSECóó€v.Ð ¤ô ÐòòInfinity€Group€Co.óó,€212€F.3d€180,€187„88€(3d€Cir.€2000),€òòcert.óóÐ P  Ðòòdeniedóó,€121€S.€Ct.€1228€(2001);€òòSECóó€v.€òòLife€Partners,€Inc.óó,€87€F.3dÐ üL Ð536,€543€(D.C.€Cir.€1996);€òòWalsóó€v.€òòFox€Hills€Dev.€Corp.óó,€24€F.3dÐ ¨ø  Ð1016,€1018€(7th€Cir.€1994);€òòRevakóó€v.€òòSEC€Realty€Co.óó,€18€F.3d€81,€87Ð T!¤" Ð(2d€Cir.€1994);€òòCurranóó€v.€òòMerrill€Lynch,€Pierce,€Fenner€&€Smithóó,Ð #P$ Ð622€F.2d€216,€222,€224€(6th€Cir.€1980),€òòaff'd€on€other€groundsóó,€456Ð ¬$ü& ÐU.S.€353€(1982).€€Other€courts€have€modeled€the€concept€of€commonÏenterprise€around€fact€patterns€in€which€an€investor's€fortunes€areÏtied€to€the€promoter's€success€rather€than€to€the€fortunes€of€hisÏor€her€fellow€investors.€€This€doctrine,€known€as€verticalÐ \+¬&. Ðcommonality,€has€two€variants.€€Broad€vertical€commonality€requiresÏthat€the€well„being€of€all€investors€be€dependent€upon€theÏpromoter's€expertise.€€òòSeeóó€òòVilleneuveóó€v.€òòAdvanced€Bus.€ConceptsÐ X ÐCorp.óó,€698€F.2d€1121,€1124€(11th€Cir.€1983),€òòaff'd€en€bancóó,€730Ð ´  ÐF.2d€1403€(11th€Cir.€1984);€òòSECóó€v.€òòKoscot€Interplanetary,€Inc.óó,€497Ð ` ° ÐF.2d€473,€478„79€(5th€Cir.€1974).€€In€contrast,€narrow€verticalÏcommonality€requires€that€the€investors'€fortunes€be€"interwovenÏwith€and€dependent€upon€the€efforts€and€success€of€those€seekingÏthe€investment€or€of€third€parties."€€òòSECóó€v.€òòGlenn€W.€TurnerÐ `  ÐEnters.óó,€474€F.2d€476,€482€n.7€(9th€Cir.€1973).Ð ¼  Ðà ` àCourts€also€differ€in€the€steadfastness€of€theirÏallegiance€to€a€single€standard€of€commonality.€€Two€courts€ofÏappeals€recognize€only€horizontal€commonality.€€òòSeeóó€òòWalsóó,€24€F.3dÐ À Ðat€1018;€òòCurranóó,€622€F.2d€at€222,€224.€€Two€others€adhereÐ l¼ Ðexclusively€to€broad€vertical€commonality.ñr ñ׃%×ñr ññr ñ׃×ñr ñÝ ƒ#ÃÝòòÚ  Ú1Ú  ÚóóÝ  Ý×  ×€€òòSeeóó€òòVilleneuveóó,€698Ð h ÐF.2d€at€1124;€òòKoscotóó,€497€F.2d€at€478„79.€€The€Ninth€Circuit€Ð Ä Ðrecognizes€both€horizontal€commonality€and€narrow€verticalÏcommonality.€€òòSeeóó€òòHockingóó€v.€òòDuboisóó,€885€F.2d€1449,€1459€(9th€Cir.Ð !l" Ð1989)€(en€banc).€€To€complicate€matters€further,€four€courts€ofÏappeals€have€accepted€horizontal€commonality,€but€have€not€yetÏruled€on€whether€they€also€will€accept€some€form€of€verticalÐ  &p!( Ðcommonality.€€òòSeeóó€òòInfinity€Groupóó,€212€F.3d€at€187€n.8;€òòLifeÐ ° ÐPartnersóó,€87€F.3d€at€544;€òòTeagueóó,€35€F.3d€at€986€n.8;€òòRevakóó,€18Ð \¬ ÐF.3d€at€88.€€At€least€one€of€these€courts,€however,€has€explicitlyÏrejected€broad€vertical€commonality.€€òòSeeóó€òòRevakóó,€18€F.3d€at€88.Ð ´  Ðà ` àThus€far,€neither€the€Supreme€Court€nor€this€court€hasÏauthoritatively€determined€what€type€of€commonality€must€be€presentÏto€satisfy€the€common€enterprise€element.€€We€came€close€inÏòòRodriguezóó,€in€which€we€hinted€at€a€preference€for€horizontalÐ d´  Ðcommonality.€€There,€promoters€selling€parcels€of€land€made€"strongÏand€repeated€suggestions€that€the€surrounding€area€would€developÏinto€a€thriving€residential€community."€€990€F.2d€at€11.€€AlthoughÏwe€held€that€the€financial€arrangement€did€not€constitute€aÏsecurity,€we€implied€that€an€actual€commitment€by€the€promoters€toÏdevelop€the€community€themselves,€coupled€with€the€buyers'€jointÏfinancing€of€the€enterprise,€could€constitute€a€common€enterprise.€ÏòòSeeóó€òòid.óóÐ Ä Ðà ` àTòòóóhe€case€at€bar€requires€us€to€take€a€position€on€theÐ pÀ  Ðcommon€enterprise€component€of€the€òòHoweyóó€test.€€We€hold€that€aÐ !l" Ðshowing€of€horizontal€commonality€ð"ð€the€pooling€of€assets€fromÏmultiple€investors€in€such€a€manner€that€all€share€in€the€profitsÏand€risks€of€the€enterprise€ð"ð€satisfies€the€test.€€This€holdingÏflows€naturally€from€the€facts€of€òòHoweyóó,€in€which€the€promoterÐ Ì'#* Ðcommingled€fruit€from€the€investors'€groves€and€allocated€netÏprofits€based€upon€the€production€from€each€tract.€€òòSeeóó€òòHoweyóó,€328Ð $+t&. ÐU.S.€at€296.€€Adopting€this€rule€also€aligns€us€with€the€majorityÏview€and€confirms€the€intimation€of€òòRodriguezóó.€€Last,€but€surelyÐ \¬ Ðnot€least,€the€horizontal€commonality€standard€places€easilyÏascertainable€and€predictable€limits€on€the€types€of€financialÏinstruments€that€will€qualify€as€securities.׃#×Ý ƒ#ÃÝòòÚ  Ú2Ú  ÚóóÝ  Ý×  ×Ð ` ° Ðà ` àò ò2.€€òòApplying€the€Standardóó.ó ó€€Here,€the€pooling€element€ofÐ  \  Ðhorizontal€commonality€jumps€off€the€screen.€€The€defendants'Ïwebsite€stated€that:€€"The€players'€money€is€accumulated€on€the€SGÏcurrent€account€and€is€not€invested€anywhere,€because€noÏinvestment,€not€even€the€most€profitable€one,€could€possibly€fullyÏcompensate€for€the€lack€of€sufficiency€in€settling€accounts€withÏplayers,€which€lack€would€otherwise€be€more€likely."€€Thus,€as€theÏSEC's€complaint€suggests,€SG€unambiguously€represented€to€itsÏclientele€that€participants'€funds€were€pooled€in€a€single€accountÏused€to€settle€participants'€on„line€transactions.€€Therefore,Ïpooling€is€established.Ìà ` àOf€course,€horizontal€commonality€requires€more€thanÏpooling€alone;€it€also€requires€that€investors€share€in€the€profitsÏand€risks€of€the€enterprise.€€The€SEC€maintains€that€two€separateÏelements€of€SG's€operations€embody€the€necessary€sharing.€€First,Ïit€asserts€that€SG€was€running€a€Ponzi€or€pyramid€scheme€dependentÐ <&Œ!( Ðupon€a€continuous€influx€of€new€money€to€remain€in€operation,׃×Ý ƒ#ÃÝòòÚ  Ú3Ú  ÚóóÝ  Ý×  ×€andÐ ° Ðargues€that€such€arrangements€inherently€involve€the€sharing€ofÏprofit€and€risk€among€investors.€€Second,€the€SEC€construes€SG'sÏpromise€to€divert€a€portion€of€its€profits€from€website€operationsÏto€support€the€privileged€company's€shares€as€a€bond€that€tiesÏtogether€the€collective€fortunes€of€those€who€have€purchased€theÏshares.€€While€we€analyze€each€of€these€theories,€we€note€that€anyÏone€of€them€suffices€to€support€a€finding€of€commonality.Ìà ` àWe€endorse€the€SEC's€suggestion€that€Ponzi€schemesÏtypically€satisfy€the€horizontal€commonality€standard.€€In€ÏòòInfinity€Groupóó,€investors€contributed€substantial€sums€of€money€toÐ h¸ Ða€trust€established€by€the€defendants€and€received€in€exchange€aÏproperty€transfer€agreement€guaranteeing€stupendous€annual€rates€ofÏreturn.€€212€F.3d€at€184„85.€€The€economic€guarantees€were€basedÏupon€the€trust's€purported€performance€experience,€financialÏconnections,€and€ability€to€pool€large€amounts€of€money.€€òòId.óó€atÐ Ä Ð185.€€Participants€were€promised€that€investing€in€the€trust€was€aÐ pÀ  Ðrisk„free€proposition,€and€that€their€cash€infusions€would€beÏrepaid€in€full€upon€demand.€€òòId.óó€at€184„85.€€Expected€profits€wereÐ \¬ Ða€function€of€the€number€of€"capital€units"€held€pursuant€to€theÏcontract€with€the€trust;€in€turn,€the€number€of€capital€unitsÏallocated€to€each€investor€was€directly€proportional€to€the€size€ofÏhis€or€her€investment.€€òòId.óó€at€188„89.€€On€these€facts,€the€ThirdÐ  \  ÐCircuit€held€that€horizontal€commonality€existed,€emphasizing€thatÏunder€the€plan's€terms€each€investor€was€entitled€to€receiveÏreturns€directly€proportionate€to€his€or€her€investment€stake.€€òòId.óóÐ `  Ðat€188.òòóóÐ ¼  Ðà ` àSG's€virtual€shares€bear€striking€factual€similarities€toÏthe€financial€instruments€classified€as€investment€contracts€inÏòòInfinity€Groupóó.€€SG's€flat€10%€guaranteed€return€applied€to€allÐ À Ðprivileged€company€shares,€expected€returns€were€dependent€upon€theÏnumber€of€shares€held,€the€economic€assurances€were€based€on€theÏpromoter's€ability€to€keep€the€ball€rolling,€the€investment€wasÏproclaimed€to€be€free€from€risk,€and€participants€were€promisedÏthat€their€principal€would€be€repaid€in€full€upon€demand.€€Like€theÏThird€Circuit,€we€think€that€these€facts€suffice€to€make€outÏhorizontal€commonality.Ìà ` àIn€all€events,€SG's€promise€to€pay€referral€fees€toÏexisting€participants€who€induced€others€to€patronize€the€virtualÏexchange€provides€an€alternative€basis€for€finding€horizontalÏcommonality.€€The€SEC€argues€convincingly€that€this€shows€theÐ $+t&. Ðexistence€of€a€pyramid€scheme€sufficient€to€satisfy€the€horizontalÏcommonality€standard.€€The€most€instructive€comparison€is€to€òòSECóó€v.Ð \¬ ÐòòInt'l€Loan€Networkóó,€968€F.2d€1304€(D.C.€Cir.€1992).€€A€key€elementÐ X Ðof€the€defendants'€elaborate,€multifaceted,€financial€distributionÏnetwork€in€that€case€was€a€pyramid€sales€program€in€whichÏparticipants€stood€to€receive€50%€commissions€on€membership€feesÏpaid€by€individuals€whom€they€recruited,€plus€lesser€commissions€onÏsales€by€those€recruited€by€their€recruits.€€òòId.óó€at€1306.€€TheÐ d´  Ðcourt€of€appeals€ruled€that€this€structure€satisfied€theÏrequirements€of€horizontal€commonality.òòóó€€òòId.óó€at€1308.€€In€theÐ ¼  Ðprocess,€it€relied€heavily€upon€the€fact€that€the€network€generatedÏincome€only€through€constant€expansion€of€membership,€whichÏdepended€on€individual€recruiting€and€the€appeal€of€the€promoter'sÏlarger€marketing€campaign.€€òòId.óóÐ l¼ Ðà ` àLike€the€investors€in€òòInt'l€Loan€Networkóó,€StockGenerationÐ h Ðparticipants€who€recruited€new€participants€were€promised€bonusesÏworth€20%„30%€of€the€recruit's€payments.€€Taking€as€true€the€SEC'sÏplausible€allegation€that€the€sine€qua€non€of€SG's€operations€wasÏthe€continued€net€inflow€of€funds,€the€investment€pool€supportingÏthe€referral€bonus€payments€was€entirely€dependent€upon€theÏinfusion€of€fresh€capital.€€Since€all€participants€shared€in€theÏprofits€and€risks€under€this€pyramidal€structure,€it€furnishes€theÏâ âsharing€necessary€to€warrant€a€finding€of€horizontal€commonality.ò òó óÐ x)È$, Ðà ` àWe€will€not€paint€the€lily.€€We€conclude,€without€seriousÏâ âquestion,€that€the€arrangement€described€in€the€SEC's€complaintÏfairly€can€be€characterized€as€either€a€Ponzi€or€pyramid€scheme,Ïand€that€it€provides€the€requisite€profit„and„risk€sharing€toÏsupport€a€finding€of€horizontal€commonality.€€Taking€as€true€theÏSEC's€allegation€that€SG's€ability€to€fulfill€its€pecuniaryÏguarantees€was€fully€predicated€upon€the€net€inflow€of€new€money,Ïthe€fortunes€of€the€participants€were€inextricably€intertwined.€€AsÏlong€as€the€privileged€company€continued€to€receive€net€capitalÏinfusions,€existing€shareholders€could€dip€into€the€well€of€fundsÏto€draw€out€their€profits€or€collect€their€commissions.€€But€all€ofÏthem€shared€the€risk€that€new€participants€would€not€emerge,€cashÏflow€would€dry€up,€and€the€underlying€pool€would€empty.Ìà ` àSG's€most€perfervid€argument€against€a€finding€ofÏhorizontal€commonality€consists€of€a€denial€that€its€operationsÏcomprise€a€Ponzi€or€pyramid€scheme.€€It€says€that€any€such€schemeÏrequires€a€material€misrepresentation€of€fact€and€some€element€ofÏfraud€or€deception,€and€adds€that€those€additional€features€areÏlacking€here;€to€the€contrary,€the€rules€of€StockGeneration€wereÏfully€and€accurately€disclosed€to€all€participants.€€We€do€notÏgainsay€that€considerable€disclosure€occurred.€€SG€emphasized€thatÏâ ânew€participants€constituted€the€sole€source€of€all€financialÐ Ì'#* Ðincome€for€its€StockGeneration€website.׃×Ý ƒ#ÃÝòòÚ  Ú4Ú  ÚóóÝ  Ý×  ×€€Indeed,€in€describing€theÐ ° Ðâ âstructure€and€mechanism€of€its€virtual€stock€exchange,€SG€drew€aÏcolorful€analogy€between€the€privileged€company's€shares€and€anÏenormous€card€table€with€a€mountain€of€money.€€According€to€SG,Ïthousands€of€participants€continuously€threw€money€onto€the€tableÏby€purchasing€shares€in€the€privileged€company,€while€otherÏparticipants€simultaneously€sold€their€shares€back€to€the€exchangeÏto€retrieve€their€winnings€from€the€table.€€SG€remarked€that€theÏsystem€would€remain€stable€so€long€as€the€size€of€the€mountainÏeither€remained€constant€or€continued€to€grow.€Ìà ` àDespite€the€fact€that€SG€was€relatively€candid€inÏpointing€out€the€fragile€structure€of€the€venture,€its€argumentÏlacks€force.€€Even€if€we€assume,€for€argument's€sake,€thatÏmisrepresentations€of€fact€and€badges€of€fraudñl ñ€or€deceptionñl ñ€are€necessary€forÏthe€existence€of€a€Ponzi€or€pyramid€scheme,€the€SEC's€complaintÏcontains€allegations€sufficient,€as€a€matter€of€pleading,€toÏestablish€both€elements.€€First,€the€complaint€alleges€that€SGÏmaterially€misrepresented€the€nature€of€the€enterprise€byÏconcealing€the€fact€that€the€supply€of€new€participants€inevitablyÏâ âwould€be€exhausted,€causing€the€scheme€to€implode€and€all€existingÐ t$Ä& Ðparticipants€to€lose€their€money.׃×Ý ƒ#ÃÝòòÚ  Ú5Ú  ÚóóÝ  Ý×  ×€€Second,€the€SEC's€complaintÐ ° Ðâ âplausibly€characterized€SG's€flat€guarantee€of€a€10%€monthly€returnÏon€the€privileged€company's€shares€and€its€assurances€that€it€wouldÏsupport€those€shares€as€material€misrepresentations€of€fact.€ÏThird,€the€SEC€alleged€that€SG€deceived€participants€by€failing€toÏdisclose€its€intent€to€keep€investor€money€for€itself.Ìà ` àOf€course,€given€its€"this€was€only€a€game"€defense,€SGÏmay€well€have€colorable€arguments€anent€materiality€and€relianceÏ(i.e.,€that,€based€upon€its€explicit€disclosures,€no€reasonableÏinvestor€should€have€been€deceived€or€misled).€€But€it€is€not€thisÏcourt's€place€to€resolve€such€fact„sensitive€questions€in€theÏcontext€of€a€Rule€12(b)(6)€motion€for€dismissal.€€òòSeeóó€òòCruzóó€v.Ð d ÐòòMelecioóó,€204€F.3d€14,€21„22€(1st€Cir.€2000).€€For€present€purposes,Ð À Ðit€is€enough€that€the€SEC's€allegations,€taken€as€true,€satisfy€theÏcommon€enterprise€component€of€the€òòHoweyóó€test.׃?˜ ×Ý ƒ#ÃÝòòÚ  Ú6Ú  ÚóóÝ  Ý×  ×Ð h Ðà@   ìàò òC.€€òòExpectation€of€Profits€Solely€From€the€Efforts€of€Othersóó.ó óˆÐ ° Ðà ` àThe€final€component€of€the€òòHoweyóó€test€ð"ð€the€expectationÐ xÈ Ðof€profits€solely€from€the€efforts€of€others€ð"ð€is€itself€divisible.€ÏWe€address€each€sub„element€separately.Ìà ` àò ò1.€€òòExpectation€of€Profitsóó.ó ó€€The€Supreme€Court€hasÐ | Ì Ðrecognized€an€expectation€of€profits€in€two€situations,€namely,€(1)Ïcapital€appreciation€from€the€original€investment,€and€(2)Ïparticipation€in€earnings€resulting€from€the€use€of€investors'Ïfunds.òòóó€€òòFormanóó,€421€U.S.€at€852.€€These€situations€are€to€beÐ H˜  Ðcontrasted€with€transactions€in€which€an€individual€purchases€aÏcommodity€for€personal€use€or€consumption.€€òòId.óó€at€858.€€The€SECÐ  ð Ðposits€that€SG's€guarantees€created€a€reasonable€expectancy€ofÏprofit€from€investments€in€the€privileged€company,€whereas€SGÏmaintains€that€participants€paid€money€not€to€make€money,€but,Ïrather,€to€acquire€an€entertainment€commodity€for€personalÏconsumption.€€Relying€heavily€on€òòFormanóó,€the€district€courtÐ üL Ðaccepted€SG's€thesis.€€òòSECóó€v.€òòSG€Ltd.óó,€142€F.€Supp.€2d€at€130„31.€Ð ¨ø  Ðâ âWe€do€not€agree.Ð T!¤" Ðà ` àIn€òòFormanóó,€apartment€dwellers€who€desired€to€reside€in€aÐ ° Ðâ âNew€York€City€cooperative€were€required€to€buy€shares€of€stock€inÏthe€nonprofit€cooperative€housing€corporation€that€owned€andÏoperated€the€complex.€€Based€on€its€determination€that€"investorsÏwere€attracted€solely€by€the€prospect€of€acquiring€a€place€to€live,Ïand€not€by€financial€returns€on€their€investments,"€the€òòFormanóóÐ  \  ÐCourt€held€that€the€cooperative€housing€arrangement€did€not€qualifyÏas€a€security€under€either€the€"stock"€or€"investment€contract"Ïrubrics.€€òòId.óó€at€853.€€The€Court's€conclusion€rested€in€large€partÐ `  Ðupon€an€Information€Bulletin€distributed€to€prospective€residentsÏwhich€stressed€the€nonprofit€nature€of€the€cooperative€housingÏendeavor.€€òòId.óó€at€854€(emphasizing€that€"[n]owhere€does€theÐ d ÐBulletin€seek€to€attract€investors€by€the€prospect€of€profitsÏresulting€from€the€efforts€of€the€promoters€or€third€parties").òòóó׃×Ý ƒ#ÃÝòòÚ  Ú7Ú  ÚóóÝ  Ý×  ×Ð l¼ Ðà ` àWe€think€it€noteworthy€that€the€òòFormanóó€Court€contrastedÐ h Ðthe€case€before€it€with€òòJoineróó.€€In€that€case,€economic€inducementsÐ Ä Ðmade€by€promoters€in€conjunction€with€the€assignment€of€oil€wellÏleases€transformed€the€financial€instrument€under€considerationÏfrom€a€naked€leasehold€right€to€an€investment€contract.€€320€U.S.Ð È"$ Ðòòóóat€348.€€The€òòJoineróó€Court€found€dispositive€advertising€literatureÐ ° Ðcirculated€by€the€promoters€which€emphasized€the€benefits€to€beÏreaped€from€the€exploratory€drilling€of€a€test€well.€€òòId.óó€("Had€theÐ X Ðoffer€mailed€by€defendants€omitted€the€economic€inducements€of€theÏproposed€and€promised€exploration€well,€it€would€have€been€a€quiteÏdifferent€proposition.").Ìà ` àThe€way€in€which€these€cases€fit€together€is€instructive.€ÏIn€òòFormanóó,€the€apartment€was€the€principal€attraction€forÐ d´  Ðprospective€buyers,€the€purchase€of€shares€was€merely€incidental,Ïand€the€combination€of€the€two€did€not€add€up€to€an€investmentÏcontract.€€421€U.S.€at€853.€€In€òòJoineróó,€the€prospect€of€exploratoryÐ h¸ Ðdrilling€gave€the€investments€"most€of€their€value€and€all€of€theirÏlure,"€the€leasehold€interests€themselves€were€no€more€than€anÏincidental€consideration€in€the€transaction,€and€the€combination€ofÏthe€two€added€up€to€an€investment€contract.€€320€U.S.€at€349.€€ThisÏdistinction€is€crucial,€òòseeóó€òòFormanóó,€421€U.S.€at€853€n.18,€and€itÐ Ä Ðfurnishes€the€beacon€by€which€we€must€steer.Ìà ` àSeen€in€this€light,€SG's€persistent€representations€ofÏsubstantial€pecuniary€gains€for€privileged€company€shareholdersÏdistinguish€its€StockGeneration€website€from€the€InformationÏBulletin€circulated€to€prospective€purchasers€in€òòFormanóó.€€WhileÐ  &p!( ÐSG's€use€of€gaming€language€is€roughly€analogous€to€theÏcooperative's€emphasis€on€the€nonprofit€nature€of€the€housingÏendeavor,€SG€made€additional€representations€on€its€website€thatÐ $+t&. Ðplayed€upon€greed€and€fueled€expectations€of€profit.€€For€example,ÏSG€ñm ñflatñm ññn ñdirectñn ñly€guaranteed€that€investments€in€the€shares€of€theÏprivileged€company€would€be€profitable,€yielding€monthly€returns€ofÏ10%€and€annual€returns€of€215%.€€In€our€view,€these€profit„relatedÏguarantees€constitute€a€not„very„subtle€form€of€economicÏinducement,€closely€analogous€to€the€advertising€representations€inÏòòJoineróó.€€In€the€same€way€that€the€prospect€of€profitableÐ ¸  Ðdiscoveries€induced€investors€to€buy€oil€well€leases,òòóó€the€prospectÐ d´  Ðof€a€sure„fire€return€lured€participants€to€buy€shares€in€theÏprivileged€company€(or€so€it€can€be€argued).Ìà ` àThis€is€not€to€say€that€SG's€gaming€language€and€repeatedÏdisclaimers€are€irrelevant.€€SG€has€a€plausible€argument,Ïforcefully€advanced€by€able€counsel,€that€no€participant€in€his€orÏher€right€mind€should€have€expected€guaranteed€profits€fromÏpurchases€of€privileged€company€shares.€€But€this€argument,€thoughÏplausible,€is€not€inevitable.€€In€the€end,€it€merely€gives€rise€toÏan€issue€of€fact€ño ñ(or,€perhaps,€multiple€issues€of€fact)€ño ñregardingÏwhether€ñp ñparticipants'€expectations€of€profit€were€reasonable€(and,Ïtherefore,€whether€ñp ñSG's€representations€satisfy€òòHoweyóó's€expectation„of„profitÐ !l" Ðrequirementñq ñ)ñq ñ.Ìà ` àò ò2.€€òòSolely€from€the€Efforts€of€Othersóó.ó ó€€We€turn€now€toÐ t$Ä& Ðthe€question€of€whether€the€expected€profits€can€be€said€to€resultÏsolely€from€the€efforts€of€others.€€The€courts€of€appeals€have€beenÏunanimous€in€declining€to€give€literal€meaning€to€the€word€"solely"Ïin€this€context,€instead€holding€the€requirement€satisfied€as€longÐ @+&. Ðas€"the€efforts€made€by€those€other€than€the€investor€are€theÏundeniably€significant€ones,€those€essential€managerial€effortsÏwhich€affect€the€failure€or€success€of€the€enterprise."€€òòTurnerÐ X ÐEnters.óó,€474€F.2d€at€482;€òòaccordóó€òòRivanna€Trawlers€Unlimitedóó€v.Ð ´  ÐòòThompson€Trawlers,€Inc.óó,òòóó€840€F.2d€236,€240€n.4€(4th€Cir.€1988)Ð ` ° Ð(adopting€this€holding€and€listing€eight€other€circuits€which€haveÏheld€to€like€effect).€€This€liberal€interpretation€of€theÏrequirement€seemingly€comports€with€the€Supreme€Court's€restatementÏof€the€òòHoweyóó€test.€€òòSeeóó€òòFormanóó,€421€U.S.€at€852€(explaining€thatÐ `  Ð"the€touchstone€is€the€presence€of€an€investment€in€a€commonÏventure€premised€on€a€reasonable€expectation€of€profits€to€beÏderived€from€the€entrepreneurial€or€managerial€efforts€ofÏothers").׃ ×Ý ƒ#ÃÝòòÚ  Ú8Ú  ÚóóÝ  Ý×  ×Ð À Ðà ` àWe€need€not€reach€the€issue€of€whether€a€lesser€degree€ofÏcontrol€by€a€promoter€or€third€party€suffices€to€give€rise€to€anÏinvestment€contract€because€SG's€alleged€scheme€meets€the€literalÏdefinition€of€"solely."€€According€to€the€SEC's€allegations,€SGÏrepresented€to€its€customers€the€lack€of€investor€effort€requiredÏto€make€guaranteed€profits€on€purchases€of€the€privileged€company'sÏshares,€noting,€for€example,€that€"playing€with€[the]€privilegedÏshares€practically€requires€no€time€at€all."€€SG€was€responsibleÏfor€all€the€important€efforts€that€undergirded€the€10%€guaranteedÐ Ì'#* Ðmonthly€return.€€As€the€sole€proprietor€of€the€StockGenerationÏwebsite,€SG€enjoyed€direct€operational€control€over€all€aspects€ofÏthe€virtual€stock€exchange.€€And€SG's€marketing€efforts€generatedÏdirect€capital€investment€and€commissions€on€the€transactionsÏ(which€it€pledged€to€earmark€to€support€the€privileged€company'sÏshares).Ìà ` àSG's€payment€of€referral€bonuses€to€participants€whoÏintroduced€new€users€to€the€website€does€not€require€a€differentÏresult.€€Even€if€a€participant€chose€not€to€refer€others€to€theÏStockGeneration€website,€he€or€she€still€could€expect,€based€onÏSG's€profit„related€guarantees,€to€reap€monthly€profits€from€mereÏownership€of€the€privileged€company's€shares.€€Accordingly,€theÏSEC's€complaint€makes€out€a€triable€issue€on€whether€participantsÏexpected€to€receive€profits€derived€solely€from€the€efforts€ofÏothers.ò òó óÐ h Ðò òIV.€€CONCLUSIONó óÐ Ä Ðà ` àWe€need€go€no€further.€€Giving€due€weight€to€the€economicÏrealities€of€the€situation,€we€hold€that€the€SEC€has€alleged€a€setÏof€facts€which,€if€proven,€satisfy€the€three„part€òòHoweyóó€test€andÐ ä"4$ Ðsupport€its€assertion€that€the€opportunity€to€invest€in€the€sharesÏof€the€privileged€company,€described€on€SG's€website,€constitutedÏan€invitation€to€enter€into€an€investment€contract€within€theÏjurisdictional€reach€of€the€federal€securities€laws.€€Accordingly,Ïwe€reverse€the€order€of€dismissal€and€remand€the€case€for€furtherÐ @+&. Ðproceedings€consistent€with€this€opinion.€€The€preliminaryÏinjunction€and€asset€freeze€shall€remain€in€force€pendingÏconclusion€of€the€proceedings€below.ÌÌò òòòReversed€and€remandedóó.ó óÐ  ` ° Ðà@””%ìàò òòòAPPENDIX€Aóóó óˆÐ ° ÐÓÓà8 ` àSecurities€Act€of€1933€ðð€2(a)(1),€15€U.S.C.€ððÏ77b(a)(1):Ð ` x` x ÐÌà8 ` àà8¨ ` x` xàThe€term€"security"€means€anyÏnote,€stock,€treasury€stock,Ïsecurity€future,€bond,Ïdebenture,€evidence€ofÏindebtedness,€certificate€ofÏinterest€or€participation€in€anyÏprofit„sharing€agreement,Ïcollateral„trust€certificate,Ïpreorganization€certificate€orÏsubscription,€transferableÏshare,€investment€contract,Ïvoting„trust€certificate,Ïcertificate€of€deposit€for€aÏsecurity,€fractional€undividedÏinterest€in€oil,€gas,€or€otherÏmineral€rights,€any€put,€call,Ïstraddle,€option,€or€privilegeÏon€any€security,€certificate€ofÏdeposit,€or€group€or€index€ofÏsecurities€(including€anyÏinterest€therein€or€based€on€theÏvalue€thereof),€or€any€put,Ïcall,€straddle,€option,€orÏprivilege€entered€into€on€aÏnational€securities€exchangeÏrelating€to€foreign€currency,Ïor,€in€general,€any€interest€orÏinstrument€commonly€known€as€aÏ"security,"€or€any€certificateÏof€interest€or€participation€in,Ïtemporary€or€interim€certificateÏfor,€receipt€for,€guarantee€of,Ïor€warrant€or€right€to€subscribeÏto€or€purchase,€any€of€theÏforegoing.Ð ¨ 0¨ 0 ÐÌà8 ` àSecurities€Exchange€Act€of€1934€ðð€3(a)(10),€15ÏU.S.C.€ðð€78c(a)(10)Ð ` x` x ÐÌà8 ` àà8¨ ` x` xàThe€term€"security"€means€anyÏnote,€stock,€treasury€stock,Ïsecurity€future,€bond,Ïdebenture,€certificate€ofÐ ,f'/ Ðinterest€or€participation€in€anyÏprofit„sharing€agreement€or€inÏany€oil,€gas,€or€other€mineralÏroyalty€or€lease,€anyÏcollateral„trust€certificate,Ïpreorganization€certificate€orÏsubscription,€transferableÏshare,€investment€contract,Ïvoting„trust€certificate,Ïcertificate€of€deposit€for€aÏsecurity,€any€put,€call,Ïstraddle,€option,€or€privilegeÏon€any€security,€certificate€ofÏdeposit,€or€group€or€index€ofÏsecurities€(including€anyÏinterest€therein€or€based€on€theÏvalue€thereof),€or€any€put,Ïcall,€straddle,€option,€orÏprivilege€entered€into€on€aÏnational€securities€exchangeÏrelating€to€foreign€currency,€orÏin€general,€any€instrumentÏcommonly€known€as€a€"security";Ïor€any€certificate€of€interestÏor€participation€in,€temporaryÏor€interim€certificate€for,Ïreceipt€for,€or€warrant€or€rightÏto€subscribe€to€or€purchase,€anyÏof€the€foregoing;€but€shall€notÏinclude€currency€or€any€note,Ïdraft,€bill€of€exchange,€orÏbanker's€acceptance,€which€has€aÏmaturity€at€the€time€of€issuanceÏof€not€exceeding€nine€months,Ïexclusive€of€days€of€grace,€orÏany€renewal€thereof€the€maturityÏof€which€is€likewise€limited.