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Securities and Exchange Commission v. SG, Ltd. | 265 F.3d 42 (2001)

The Securities and Exchange Commission, or S E C, is authorized to regulate securities transactions. But does its reach extend to entirely virtual stocks in phantom companies? That was the issue in Securities and Exchange Commission versus S G, Limited.

S G ran a virtual, online stock exchange. Users could purchase shares of stock in eleven virtual companies. S G set stock prices in biweekly rounds and allowed investors to buy or sell as much stock as they wanted at the posted prices.

S G designated one virtual entity as a privileged company and guaranteed users that shares in this company would only appreciate. S G asserted that the privileged company had several revenue streams guaranteeing its increasing value.

Over eight hundred people purchased virtual shares, investing millions of dollars. In nineteen ninety-nine, investors first experienced difficulties cashing out their virtual shares. In two thousand, S G suspended all withdrawals and reduced balances in every company except the privileged company. S G then announced a reverse stock split, wiping out nearly the entire value of all listed stocks.

The S E C filed a civil suit alleging that S G’s activities violated federal securities laws. The district court dismissed the S E C’s complaint, finding that S G’s virtual stock exchange was a game, not subject to securities regulation. The S E C appealed.

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