Stock Generation allowed people to trade "virtual companies" using real money and promised unsustainably high returns on investment.
[a][1] Two weeks later, SG peremptorily announced a reverse stock split for its highest-yield company, applying a caveat in the definition for companies 10 and 11 (as defined in Rule 26.6)[b] which caused the share prices to plummet to less than 1/10,000 of their previous values, while other shares (including those that were "guaranteed" not to decrease in value) were devalued by 50% to 95%.
[5] The court initially ruled in favor of Stock Generation, stating that the site adequately described the market as "a game", not an investment vehicle.
[6] The United States Court of Appeals for the First Circuit later reversed the District Court, stating that "the opportunity to invest in the shares of the privileged company, described on SG's website, constituted an invitation to enter into an investment contract within the jurisdictional reach of the federal securities laws.
Judging from the complaints on the SG bulletin board, application of rule 13 had become widespread by early 2000, as demands for withdrawals increased.
[1] Stock Generation continued to operate for several weeks after that, offering returns of up to 150% a month, but further legal troubles led to their website being halted by June 1, 2000.
The description below is a quotation of the public information from the United States Court of Appeals for the First Circuit, as decided in SEC v. SG, Ltd et al., 265 F.3d 42 (1st Circuit 2001):[7] "StockGeneration" website offering on-line denizens an opportunity to purchase shares in eleven different "virtual companies" listed on the website's "virtual stock exchange."
As a backstop, SG pledged to allocate an indeterminate portion of the profits derived from its website operations to a special reserve fund designed to maintain the price of the privileged company's shares.
As a further hedge against adversity, SG alluded to the availability of auxiliary stabilization funds which could be tapped to ensure the continued operation of its virtual stock exchange.
SG's website contained lists of purported "big winners," an Internet bulletin board featuring testimonials from supposedly satisfied participants, and descriptions of incentive programs that held out the prospect of rewards for such activities as the referral of new participants (e.g., SG's representation that it would pay "20, 25 or 30% of the referred player's highest of the first three payments") and the establishment of affiliate websites.