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On their website legal firm Barnett & Linn list one of their practice areas as ‘SEC Compliance‘.

William Barnett and Roger Linn have each been representing business clients for over 30 years. Together they bring a wealth of experience and extensive knowledge to achieve efficient and practical solutions to their clients.

Barnett & Linn specialising in SEC compliance and the fact that they are based out of California, are likely the primary reasons WCM777 founder Xu Ming approached the firm for legal consultation.

Turns out Ming himself wasn’t sure if WCM777’s “Profit Points” compensation plan component would be seen as an unregistered security by the SEC.

In addition to offering affiliates a 100 day passive ROI on investments of up to $1999 and recruit commissions for bringing new investors into the scheme, WCM777 also offered affiliates what they called “Profit Points”.

Taken from the BehindMLM WCM777 review:

Profit Points are issued with each membership position purchase, with WCM777 claiming that the points ‘will be turned into stock when WCM goes public on NASDAQ‘.

In addition to points generated on the purchase of membership positions, 20% of all WCM777 affiliate’s earnings are held by the company “to purchase profit points” with.

Despite appearing to have “unregistered security” written all over it (points awarded on the expectation of future profit via the company going public), when approached for legal advice Barnett & Linn thought otherwise.

The website WCM777.me was launched in mid 2013 and is registered to Xu Ming of World Capital Market, operating out of an address in Pasadena, California.

The primary function of the WCM777.me website appears to be that of a communication portal, with which affiliates and WCM777 executive management can exchange information amongst themselves.

On the 1st of October an account using the name “Phil Ming Xu” created a new thread on the forum in an attempt to justify WCM777’s compensation plan. Titled ‘SEC LAWYER’S LEGAL OPNION ON PROFIT POINTS’, Ming published what appears to be a letter from Barnett & Linn advising the company that their profit points “do not appear” to ‘fall under the category of a “security”‘, unregistered or otherwise.

barnett-and-linn-legal-opinion-wcm777-profit-points-october-2013

Barnett & Linn’s letter opens with their explanation of WCM777’s profit points component of their compensation plan:

You have requested that we review the proposed point system (the “Points”) to be initiated by WCM777 (“WCM777”) in regard to its multi-level distribution program, as to whether the points may be considered securities under the Securities Act of 1933, as amended (the “1933 Act”).

We understand the relevant facts as follows: WCM777 sells CLOUD products through a multi-level distribution network. Its member-distributors (“Members”) receive commissions based upon the dollar amount of products purchased from WCM777.

WCM777 also proposes to distribute Points to its Members, the number of which will also be based upon the dollar amount of products purchased from WCM777. Each point will have an initial value. The Member will be able to redeem the Points for cash or additional products, at the option of the Member.

In addition the Member can transfer and assign his/her Points to another Member.

For the most part this seems accurate. Although WCM777 don’t sell cloud-services, so much as bundle access to them with participation in the company’s 100 day passive investment scheme. The more money an affiliate invests, the more profit points they are allocated (both on the initial deposit and subsequent 20% mandatory ROI conversion into profit points).

Based on the proposed use and distribution of the Points as set forth above, it does not appear that the Points would fall under the category of a “security” as normally defined under the 1933 Act. We then reviewed the attributes of the Points in relationship to an “investment contract”.

An investment contract is defined under the “common enterprise test” under the 1933 Act and in subsequent court cases as (a) an investment of money due to the (b) expectation of profits arising from (c) a common enterprise (d) which depends solely on the efforts of others.

Although the characteristics of “an investment of value” and “a common enterprise” may exist in this situation, the other two prongs of the four prong test are missing and have not been met.

It is unclear how or why these Points, when distributed to the Members, would ever increase in value above their initial value nor is it clear as to whose efforts would cause such an increase in value, if any.

Applying the “common enterprise test” to WCM777’s offering, as presented by Barnett & Linn, would be as follows:

(a) an investment of money

Affiliates invest money with WCM777, with the company accepting dollar amounts ranging from $399 to $1999.

 due to the (b) expectation of profits

The notion that affiliates invest in WCM777 with the expectation of profits should be obvious enough. The 100 day passive ROI the company itself advertises is the primary marketing point used by WCM777 affiliates to market the scheme to new investors.

from (c) a common enterprise

As per WCM777’s business model and compensation plan, “common enterprise” as it exists by definition would be the investing and re-investing of money by the company’s affiliates.

(d) which depends solely on the efforts of others.

All investments are made by affiliates, with an affiliate’s own involvement in their ROIs and subsequent profit point shares not extending beyond their initial and ongoing financial contribution to the scheme.

Without additional affiliate investment (from “others”), a WCM777 affiliate cannot be paid a ROI, 20% of which is converted into profit points.

Given this, I’m at a loss to explain Barnett & Linn’s claim that ‘the other two prongs of the four prong test (3 and 4) are missing and have not been met‘.

As for

It is unclear how or why these Points, when distributed to the Members, would ever increase in value above their initial value nor is it clear as to whose efforts would cause such an increase in value, if any.

That much should again be obvious. WCM777 needs a constant influx of newly invested affiliate money to sustain itself. The more new money being injected into the scheme, the higher the perceived value of the company’s profit points.

Given the virtual nature of the points, with all real monies being held by WCM777 in the interim, whether or not the points are pegged to real dollars is irrelevant. Affiliates will most definitely perceive value in the points, based directly on the perception of how healthy the scheme is, which is in turn directly tied into how much newly invested affiliate money is being pumped into the scheme.

Underscoring this is WCM777’s inclusion of the profit points in the company’s compensation plan. An MLM compensation plan is used to explain to affiliates how they generate commissions (income) via participation in the company. This alone attributes an expectation of profit (perceived or otherwise) to WCM777’s profit points. This holds true irrespective of whether or not Barnett & Linn took the time to go over the rest of WCM777’s compensation plan.

In USA, courts have also applied a “risk capital” approach whereby a security can exist if (i) funds are being raised for a business venture (ii) where the funds are raised from the public (iii) in which the investor will have little or no participation in the enterprise and (iv) the investor’s money is substantially at risk because it is inadequately secured.

In this approach it does not appear that any of the factors would be satisfied other than the fact that the Points would be inadequately secured.

None of the above factors would be satisfied bar one? What crack are these guys smoking?

 (i) funds are being raised for a business venture

You’re going to argue WCM777 and any subsequent front company they set up as an IPO is not a business venture?

What???

(ii) where the funds are raised from the public

WCM777’s affiliate investors are not from the public?

What???

(iii) in which the investor will have little or no participation in the enterprise

Affiliates invest in WCM777, sit back and do nothing. That’s not “little or no participation”?

What???

The fourth point (which is the only once Barnett & Linn concede applies) is obvious enough. Ponzi ROIs and “profit points” purchased out of Ponzi ROI funds are naturally “substantially at risk because” because they are “inadequately secured”.

Duh.

On what basis Barnett & Linn dismiss the other three points though I have no idea. The firm’s letter to Xu Ming concludes with;

The Points, when issued to a Member, become the sole property of the Member and therefore he/she can do anything with such property that he/she can do with any other property that he/she owns.

This would include assigning and transferring the Points to other Members in return for consideration, if any, agreed to between the selling and buying Members.

We have limited our review to issues of federal securities law and California law only; no review has been made as to the effect of the foregoing proposed transactions on the laws of any other jurisdiction.

This letter is being provided solely for your use and may not be relied on by any other party other than WCM777 for any reason, whatsoever, without our express consent in writing.
Sincerely,

BARNETT & LINN

William B. Barnett

The assertion that the points themselves belong to WCM777’s affiliates I have nothing against, other than pointing out that given the entire company is a Ponzi scheme and the money invested is “inadequately secured”, comparing WCM777’s profit points to tangible personal property seems silly.

If WCM777 collapsed or was shut down, whether members can buy, sell or transfer the points becomes a moot point (no pun intended).

Again, whether or not Barnett & Linn took a look at the wider WCM777 compensation plan and business model is unclear, however at best the analysis they provided Xu Ming is paper-thin.

Whether or not Barnett & Linn’s analysis was intended to hold up in court I have no idea but I suspect that if the matter did wind up in court, that the SEC would abolish any arguments made with little to no effort.

Ultimately this is reflected in Ming Xu’s own actions following the publication of Barnett & Linn’s “you’re not selling unregistered securities” letter. Two weeks after Ming published the letter on the WCM777.me website, the company abandoned their US operations.

No official reason has surfaced as to why WCM777 fled the US, however they did state a company policy to “abide by local laws” in the countries they operate in. Ponzi schemes and the selling of unregistered securities are of course illegal in the US.

Despite WCM777 pulling out of the US just over two weeks ago now, it was only today that an affiliate investor of the company attempted to publish Barnett & Linn’s above letter to Ming as supposed proof the company was not operating a global Ponzi scheme.

Whether or not WCM777 can stop its affiliates running around the internet publishing misinformation in defence of the company remains to be seen. They did however issue the following directive to WCM777 affiliates sometime in the last twenty-four hours:

Reorganize Internet Marketing

Posted on October 28, 2013.

WCM777 global legitimacy is to implement new policies and procedures and regulations in accordance with laws of the target countries. WCM777 is headquartered in Hong Kong.

In the transitional period, WCM777 would like to ask affiliates for their cooperation and support on reorganizing Internet marketing:

1. Please remove all WCM777 related videos on all online platforms. As WCM777 is relocating to Hong Kong, some information in the early videos may not accurately reflect WCM777 operations.

The company will create an official video presentation that affiliates can utilize.

2. All promotional websites must follow the company policies and procedures. Content used with WCM777’s logo and trademark may not be used without written consent.

Please take down all unauthorized websites currently up. To protect the legitimacy and long-term development of the company, WCM777 reserves the right to apply penalties to and/or freeze accounts of distributors violating company policies and procedures. Thank you for your cooperation.

Kind of amusing when you consider that WCM777’s own official marketing presentations clearly presented the opportunity as that of a passive investment scheme:

investment-plans-wcm777

Good luck stuffing that cat back into the bag.