SG Limited (SG) (defendant) started a website that operated a virtual stock exchange. The virtual stock exchange was made up of virtual companies, the stock of which the website’s users could buy or sell. The website stated that the users’ funds were pooled into a single account from which users were paid when they sold virtual stock. SG told users that the game was risk-free, guaranteeing at least a 10 percent return. SG also told users that it would pay them on demand when they wished to sell. In addition, the website paid each user who referred a new client a bonus of 20 to 30 percent of the new client’s buy-in. The Securities and Exchange Commission (SEC) (plaintiff) filed suit, alleging that the website users’ purchases of stock in the virtual companies were investment contracts, thus requiring SG and its website to comply with federal securities laws. The district court dismissed the SEC’s claim. The SEC appealed.