The Government continues to mischaracterize I2G’s Business Model and Securities Law
The government mischaracterizes the I2G business model against the weight of its evidence, ignores published case law, and relies on conflicting and subjective motivations of select witnesses to support its erroneous finding that the Emperor packages were securities. Based on relevant case law, the overwhelming proof through I2G marketing materials, testimony, and its business model refutes their findings. As a matter of law, the Emperor packages are not investment contracts.
The determination of whether a transaction is an investment contract and, therefore, a security lies in the “context” or economic realities underlying the transaction. (Doc 691 9680) The economic reality of I2G was that it was a multi-level company where the success of i2G distributors named “emperors”, as in any MLM, depended on their hard work and ability to sell products and drive customers to the i2G products. (144, 151, 155 Doc 511#4865) The i2g business plan 503b, PowerPoint presentation, conference calls, conference calls, and testimony from witnesses supported the MLM model where work is required. The distributor terms and conditions communicated an MLM model with no stated guarantees of income. These are an objective inquiry into the expectations of a reasonable investor under the circumstances. Union Planters Nat’l Bank v. Commercial Credit Business Loans, Inc., 651 F.2d 1174, 1181 (6th Cir. 1981); Warfield v. Alaniz, 569 F.3d 1015, 1021 (9th Cir. 1981).
I. Investment
The First prong of the Howey test is an investment of money. The Government contends that the Emperor Packages were an “investment” because they gave up “tangible and definable consideration in return for an interest that had substantially the characteristics of a security.” Int’l Bhd. of Teamsters v. Daniel, 439 U.S. 551, 560 (1979). The emperor package, however, lacked key characteristics of security. 1.) They were not papered (doc 691 #9685) 2.) They were bundled with actual products with intrinsic value for “personal use” 3.) They included sublicenses (doc 691 #9684) with resale rights of the products. 4.) They included commissions directly tied to their efforts to drive customers to the i2G casino, social casino, and fantasy sports products 5.) They required a signed i2g terms and conditions contract attached to their understanding of the business model and explicitly precluding a security 6.)They had a refund policy 7.) The “profit share” component was conditional on whether casino profits occurred.
The government repeatedly misused “investment” language to misrepresent distributor product purchases and suggest they were “securities.” Regardless, the distributor witnesses did not describe themselves as “investors,” and each acknowledged they joined an MLM opportunity with varying motivations. Logan, for instance, expressed his interest in obtaining a master license for all current and future products and driving customers to the i2G fantasy sports. (doc 701 10840,44) Sieb was excited to become “casino affiliates” (doc 673#8704), Wiksten was excited about sports betting (Doc 683 #8675) and Vougeot joined because of Sonstagram. (Doc 669 #69o1, 02) On the other hand, Steven Barnes joined because of the i2G Touch. (cite) Anzalone brought the i2G Touch to I2g because he was so impressed with the technology. (Doc 465 3583) Dugger described loving all the products and the customer-driven business plan.(Doc9466-70) The motivations of a few participants who did not want to recruit can not be representative of all the participants and is not dispositive to the i2G plan, which instead relied on driving customers to the I2G products. (cite) Even if a distributor joined with an expectation of “profit return,” that still can not judge the motivations of thousands of others who joined for i2G business opportunity or to acquire the i2G products.
The government leans on the distinguishing facts of Daniel where the the Court wrote that determining whether a purchase with security and non-security characteristics is a security requires evaluating whether the “interest obtained had to a very substantial degree elements of investment contracts.” Id. (internal quotations omitted). The emperor packages, with no severable or substantial portion defined with the characteristics of a security, were not a security as a matter of law.
Emperor distributors could earn commissions by selling i2G products to both IBO and non-ibo customers and driving ultimate users to the online casino. The Emperor packages included licensing rights to six products that paid commissions (101a and 101b), including customer casino chip (101c) and fantasy sports transactions independent of any revenue share. Emperor potential earnings were primarily derived from product sales detached from the non-guaranteed and “conditional” revenue share(Ex. 107b at 10, 15-23; Ex. 106a; Ex. 106b). which were not substantial, readily definable or guaranteed. Therefore, the Emperor packages did not qualify as investment contracts.
II. Profits
The Government’s claim that the share of casino revenues received by Emperors constituted profits is flawed for two reasons. Firstly, the government confuses the development of investor capital, which is required under securities law’s definition of profits and the purchase of a revenue stream fails to meet this definition. Secondly, I2G’s revenue projections and economic realities suggest that Emperor packages were treated as sales revenue, not casino investments. Therefore, the sales were unrelated to the casino’s profitability
In accordance with the Supreme Court’s decision in Edwards and this Circuit’s previous rulings, profits are generated from the investment of an investor’s capital or from the participation in earnings that come from the utilization of an investor’s funds. This principle was affirmed in Union Planters National Bank v. Commercial Credit Business Loans, Inc., 651 F.2d 1174, 1184 (6th Cir. 1981) and SEC v. Edwards, 540 U.S. 389, 394 (2004). However, this principle is not applicable in the case of i2G. Anzalalone confirmed that the profits from Emperor product sales were not “pooled” but were rather linked to sales commissions. i2G had already invested in the I2G casino and planned to generate revenue by developing a marketing force and selling product licensing rights to the Emperors. Portions of i2G’s revenue were utilized to cover supplier contract expenses, but they were not related to the development of casino profits, which is necessary to qualify as “profits.”
The government misrepresents the purpose of Emperor package sales revenue intended for product development and sales commissions per the i2G compensation plan. The plan did not involve generating profits from pooled investments. This is evident from Ex. 503b at 1-2, Ex. 503c, which shows that i2G planned to fund its start-up costs using equity proceeds. Although some of the Emperor package sales revenue may have been used to pay administrative fees, this is separate from capital development, which was not a part of the plan. This aligns with the Kansas State Bank v. Citizens Bank of Windsor ruling, 737 F.2d 1490, 1495 (8th Cir. 1984).
There, the court explicitly rejected the idea that the loans provided were investments for profits on the basis that (1) the defendant intended to “use the proceeds as operating funds and not for capital improvement” and (2) there was “no prospect of capital appreciation.” Id. The circumstances are similar to I2G plan in that Emperor package sales were used as operating funds, and there was no prospect for capital appreciation in any manner. The economic realities of the I2G mlm business model support this conclusion. Ex. 503b at 3.
III. Horizontal Commonality
The Government mistakenly asserts that the Emperor packages pass this circuit’s horizontal commonality test because they shared in the pro-rata profits and losses of the Casino. This assertion is factually incorrect. Because the amount of casino commissions was directly tied to the bv acquired by sending customers to play at the casino and fantasy sports and other ways of earning, the emperor earnings from product revenues had the potential to vary tremendously despite an equivalent initial investment. In addition, the Casino’s losses never reached the Emperors. Horizontal Commonality assumes that profits are pooled from the same source unlike with I2G. As a matter of law, the revenue-sharing agreement cannot be considered horizontal commonality
The Emperor packages included bonus structures that granted an increased percentage of Casino revenues based on sales performance. This means that the Casino revenues were not shared on a pro-rata basis. Nor did the revenue agreement share losses between I2G and the Emperors. Since I2G made the initial investment in setting up the Casino, I2G is the only one to bear the risk of losses if the Casino failed to operate at a profit. Although the Casino revenue could be low or non-existent if the Casino performed poorly, individual Emperors could still earn through sales performance, which required I2G to pay commissions even as I2G operated at a loss. These economic realities I2G Emperor package sales clearly demonstrate that there was no pooling of funds, no sharing of pro-rata profits and losses, and therefore, no horizontal commonality and no security.
IV. Efforts of Others
The Government misascribes I2G’s managerial or entrepreneurial role instead of its actual ministerial role. Both experts Warren and Harlan testified that an investment contract is not a security if it relies on the “investors” driving their own investment, even were an individual investor not “required to drive the investment if the overall framework and understanding relies on the “investors” driving their investment, the product can not be a security. (v20 pg 48-50 9701-9703 V13 pg 82-84 #8650-52)
The overwhelming Government evidence proves that casino profits were intended and operationally tied to distributor or “investor” efforts as opposed to that of I2G. Government witnesses Reynolds (Doc 497 #4021-32, 4048, 49, ex103 104, Doc 498 #4063) affirmed his software tracked product and casino transactions (101C) via casino Api feed as “the whole point” (doc 497 #4048) and that both member and non-member “casino customers” transactions generated bv (#497 4049) payable as commissions.
Keep (Exh145, Exh 101C Casino Transactions, doc 487 #3870doc 487 #3859 ) and Anzalone (Doc 505 #4222,#4551-4554 Exh 145 exh 158 6 Ways) both affirmed casino profits were tied to bv generated from sending customers to purchase casino chips in the i2G casino.
The government and exhibits (101B, 158, 103, 104, 145, 101C) proved that bv was attached to casino transactions and payable as commissions to the referring distributor. “Effort of others,” exclusively tied to distributor/“investors’ efforts and not to i2G, disproving a security. Bv is exclusively tied to distributors’ efforts.
As per the Howey test, 6th Circuit application of the law, and security witnesses Harlan and Warren, an investment contract is defined by a “common pooling of funds” driven primarily by efforts “other than the investors,” specifically those with managerial control of the investment.
The Court understood the casino plan was to be driven by distributors (V21 pg 39 #100026).
As I2G stated in its marketing materials, the Emperors’ marketing efforts were the primary driver of casino revenues and, therefore, of the Emperor’s potential revenue earnings. Ex. 107b at 15; Ex. 107a at 15 (referring to revenue from worldwide gambling as “commissions”). I2G’s role was to manage the administrative side of the business while the network marketing force attempted to grow the Casino business. Ex. 503b at 2.
The government proves the appellant’s point with I2G marketing materials showing “get paid every time someone places a bet worldwide”. Appellee’s Br. at 49. This 25% bv attached to casino bets proves the “efforts of others” could only be the effort of distributors, excluding management because business volume can only be generated by distributor efforts. (158 6 Ways to Get Paid)
The government claims the witnesses it presented understood the Emperor package and its corresponding revenue-sharing agreement to be passive income. However, the determination of whether a purchase constitutes a security is an objective inquiry, and the subjective motivations of investors are irrelevant. This was established in the SEC v. Xia, Case No. 21-CV-5350, 2022 U.S. Dist. LEXIS 221555 at *51 (E.D.N.Y. Dec. 8, 2022), which cites SEC v. Aqua-Sonic Prods. Corp., 687 F.2d 577, 584 (2d Cir. 1982), stating that courts are to examine the offering from an objective perspective. The i2G material did not state that commissions were passive income but that recruiting was not required, supporting the i2G model of sending customers to the casino and i2G products. Emperors stated that is was not represented as an investment (doc 701 #10943) but rather as a business opportunity that was contingent on the success of the casino. R. 667:#6785; R. 669:#6995. There were 5000 Emperor packages marketed – the fact that a small handful subjectively believed that the packages were a way to earn passive income is not an indication that I2G marketed the Emperor packages as a passive investment.
Appellants maintain that the ability of participants to act independently in a business arrangement “cuts sharply against” a finding that the enterprise relied on the efforts of others. Kerrigan v. Visalus 112 F. Supp. 3d 580 (E.D. Mich. 2015). While Visalus did not make a final decision on the existence of an investment contract, its reasoning was sound in this regard and is applicable to this case. Here, Emperors had opportunities to make money from their purchases in numerous ways and, because I2G’s business model relied on their entrepreneurship, were empowered by the company to do so. The I2G’s business model and its representations clearly demonstrate that I2G was not looking to sell its Emperors the opportunity to earn income “solely on the efforts of others.”