## Facts

- SG Ltd. and an affiliated entity operated “StockGeneration,” an internet site described as a “virtual stock exchange” where users bought “virtual shares” in eleven “virtual companies” at prices set solely by SG.
- SG set biweekly purchase and sale prices, guaranteed liquidity at posted prices, and imposed no upper limit on the amount users could invest.
- The SEC focused on “privileged company” shares, which the site urged users to prioritize and advertised as a “game without any risk,” claiming the share price “only rises.”
- The site represented that privileged company shares would yield “risk-free” returns of 10% per month (215% per year) and offered referral bonuses of 20–30% of a new participant’s buy-in.
- The SEC alleged participants paid real money; SG pooled funds in a single account used to pay redemption requests, and the arrangement operated as a pyramid scheme.
- SG allegedly slashed share values nearly 100% and stopped honoring redemption requests, causing losses to tens of thousands of investors.

## Issues

1. Whether the alleged opportunity to purchase “virtual shares” constituted an “investment contract,” and therefore a “security,” under federal securities laws.
2. Whether the district court erred in dismissing the SEC’s complaint under Rule 12(b)(6) based on the website’s characterization of the activity as a game.

## Decision

- The First Circuit reversed the Rule 12(b)(6) dismissal and remanded.
- Taking the SEC’s allegations as true, the court held the complaint plausibly alleged an “investment contract” within the reach of federal securities laws.
- The court rejected the view that calling an arrangement a “game” removes it from securities regulation when the alleged economic substance satisfies the investment-contract test.

## Legal Principles

- Whether an arrangement is a “security” turns on economic reality, not labels or disclaimers.
- Under the Howey test, an “investment contract” exists where there is: (1) an investment of money, (2) in a common enterprise, (3) with a reasonable expectation of profits, (4) to be derived from the efforts of others.
- At the motion-to-dismiss stage, a court must accept well-pleaded allegations as true and draw reasonable inferences in the plaintiff’s favor; dismissal is improper where the complaint plausibly pleads the Howey elements.

## Conclusion

The court held that the SEC plausibly alleged StockGeneration’s sale of “virtual shares” was an investment-contract scheme because participants invested real money in a pooled enterprise with promised profits dependent on SG’s exclusive pricing and redemption control, so the case could proceed despite the site’s game-like framing.


SEC v. SG Ltd., 265 F.3d 42 (1st Cir. 2001)