THE SECURITIES AND REGULATION CODE

(R.A. No. 8799)

I. Definition of terms:

Securities
 Shares, participation, or interests
o in a corporation
o in a commercial enterprise
o in a profit-making venture

 evidenced by a certificate, contract, instrument

o whether written or electronic in character

 including
o shares of stock, bonds, debentures, notes, evidence of indebtedness, asset-backed
securities
o investment contracts, certificates of interest or participation in a profit sharing
agreement, certificates of deposit for a future subscription
o fractional undivided interests in oil, gas, or other mineral rights
o derivatives like options and warrants,
o certificates of assignments, certificates of participation, trust certificates, voting
trust certificates, or similar instruments
o propriety or non-propriety membership certificates in corporations
o other instruments as may in the future be determined by the SEC

Issuer – the originator, maker, obligor, or creator of the security.

Broker – is a person engaged in the business of buying and selling securities for the account of
others

Martinez vs Yek Tong Lin; 67 Phil. 436 (1939)

There is no question that C. B. Co., Inc., purchased the 11,000 shares of the B. G. M.
Co. upon its own account, and thereafter sold them also upon its own account, a part to
H. I. Co., Inc., and a part to A. E., in violation of its obligations as a broker, for as such
broker it could neither purchase nor sell shares upon its own account. The compliance
with this obligation was guaranteed by the surety under paragraph (c) of the bond
transcribed in the decision.

Dealer – any person who buys and sells securities for his/her own account in the ordinary course
of business.

Associated person of a broker or dealer – an employee thereof who, directly exercises control
or supervisory authority, but does not include a salesman, or an agent or a person whose functions
are solely clerical or ministerial.
Clearing Agency – any person who acts as intermediary in making deliveries upon payments to
effect settlement in securities transactions.

Exchange – an organized marketplace or facility that brings together buyers and sellers and
executes trades of securities and/or transactions.

Insider
 the issuer
 a director or officer (or any person performing similar functions) of, or a person
controlling the issuer
 a person whose relationship or former relationship to the issuer gives or gave him access
to material information about the issuer or the security that is not generally available to
the public
 A government employee, director, or officer of an exchange, clearing agency and/or self-
regulatory organization who has access to material information about an issuer or a
security that is not generally available to the public
 a person who learns such information by a communication from any forgoing insiders

Pre-need Plans - are contracts which provide for the performance of future services of or the
payment of future monetary considerations at the time actual need, for which plan holders pay in
cash or installment at stated prices, with or without interest or insurance coverage and includes
life, pension, education, interment, and other plans which the Commission may from time to time
approve.

Promoter - a person who, acting alone or with others, takes initiative in founding and organizing
the business or enterprise of the issuer and receives consideration therefor.

Prospectus - the document made by or on behalf of an issuer, underwriter or dealer to sell or

offer securities for sale to the public through registration statement filed with the Commission.

 Preliminary Prospectus – part of Registration Statement.

 Final Prospectus – sales brochure.

Registration Statement - the application for the registration of securities required to be filed
with the Commission.

Salesman - a natural person, employed as such as an agent, by a dealer, issuer or broker to buy
and sell securities.

Uncertificated Security - a security evidenced by electronic or similar records.

Underwriter - a person who guarantees on a firm commitment and/or declared best effort basis
the distribution and sale of securities of any kind by another company.

II. REGISTRATION REQUIREMENT:

GR: All securities that are to be sold or offered for sale or distribution within the
Philippines are required to be registered with SEC.
Exceptions:
 Exempt Securities – those that may be sold or offered to the public without the required
registration.
 Securities covered by exempt transactions – those whose sale need not be registered.

Note: Securities not exempt or securities, the sale of which, is not an exempt transaction cannot
be offered for sale unless registered or permitted to be sold.

Exempt Securities:
 Reasons:
o Issuer trusted not to deceive the investor
o Issuer already regulated, supervised and monitored by another government entity
expected to protect the interest of investors

 The requirement of registration shall not, as a general rule, apply to any of the following
cases of securities:
o Any security issued or guaranteed by:
 the Government of the Philippines
 any political subdivision or agency thereof
 any person controlled or supervised by, and acting as an instrumentality of
said Government

Araneta vs Gatmatian; 101 Phil. 328 (1957)

An action against the government officials sued in their official capacity, is
essentially one against the government, and to require these officials to file a
bond would be indirectly a requirement against the government, for as
regards the bond or damages that may be proved, if any, the real party in
interest would be the Republic of the Philippines. The reason for this
pronouncement is understandable; the State undoubtedly is always solvent.

o Any security issued or guaranteed by:

 the government of any country with which the Philippines maintains
diplomatic relations
 any state, province or political subdivision thereof on the basis of
reciprocity: Provided, That the Commission may require compliance with
the form and content for disclosures the Commission may prescribe

o Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the

proper adjudicatory body.

o Any security or its derivatives the sale or transfer of which, by law, is under the
supervision and regulation of the Office of the Insurance Commission, Housing
and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue.

o Any security issued by a bank except its own shares of stock.

 o Any class of securities added by the SEC by rule or regulation after public
hearing, add to the foregoing any class of securities if it finds that the enforcement
of this Code with respect to such securities is not necessary in the public interest
and for the protection of investors.

Exempt Transactions:
 Reasons:
o Small amount involved
o Limited character of public offering

Note: The security itself may or may not be exempt.

 The requirement of registration under SEC shall not apply to the sale of any security in
any of the following transactions:
o At any judicial sale, or sale by an executor, administrator, guardian or receiver or
trustee in insolvency or bankruptcy.

o By or for the account of a pledge holder, or mortgagee or any of a pledge lien

holder selling of offering for sale or delivery in the ordinary course of business
and not for the purpose of avoiding the provision of this Code, to liquidate a bona
fide debt, a security pledged in good faith as security for such debt.

o An isolated transaction in which any security is sold, offered for sale, subscription
or delivery by the owner therefore, or by his representative for the owner’s
account, such sale or offer for sale or offer for sale, subscription or delivery not
being made in the course of repeated and successive transaction of a like character
by such owner, or on his account by such representative and such owner or
representative not being the underwriter of such security

o The distribution by a corporation actively engaged in the business authorized by

its articles of incorporation, of securities to its stockholders or other security
holders as a stock dividend or other distribution out of surplus.

o The sale of capital stock of a corporation to its own stockholders exclusively,

where no commission or other remuneration is paid or given directly or indirectly
in connection with the sale of such capital stock.

o The issuance of bonds or notes secured by mortgage upon real estate or tangible
personal property, when the entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a single sale.

o The issue and delivery of any security in exchange for any other security of the
same issuer pursuant to a right of conversion entitling the holder of the security
surrendered in exchange to make such conversion: Provided, That the security so
surrendered has been registered under this Code or was, when sold, exempt from
the provision of this Code, and that the security issued and delivered in exchange,
if sold at the conversion price, would at the time of such conversion fall within the
class of securities entitled to
 registration under this Code. Upon such conversion the par value of the security
surrendered in such exchange shall be deemed the price at which the securities
issued and delivered in such exchange are sold.

o Broker’s transaction, executed upon customer’s orders, on any registered Exchange

or
other trading market.

o Subscriptions for shares of the capitals stocks of a corporation prior to the

incorporation thereof or in pursuance of an increase in its authorized capital
stocks under the Corporation Code, when no expense is incurred, or no
commission, compensation or remuneration is paid or given in connection with the
sale or disposition of such securities, and only when the purpose for soliciting,
giving or taking of such subscription is to comply with the requirements of such
law as to the percentage of the capital stock of a corporation which should be
subscribed before it can be registered and duly incorporated, or its authorized,
capital increase.

o The exchange of securities by the issuer with the existing security holders
exclusively, where no commission or other remuneration is paid or given directly
or indirectly for soliciting such exchange.

o The sale of securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period.

o The sale of securities to any number of the following qualified buyers:

 Bank
 Registered investment house
 Insurance company
 Pension fund or retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or manage by a bank or
other persons authorized by the Bangko Sentral to engage in trust
functions
 Investment company
 Such other person as the Commission may rule by determine as qualified
buyers, on the basis of such factors as financial sophistication, net worth,
knowledge, and experience in financial and business matters, or amount of
assets under management.

o Other transactions that the SEC may exempt if it finds that the requirements of
registration under this Code is not necessary in the public interest or for the
protection of the investors such as by the reason of the small amount involved or
the limited character of the public offering.

POHIBITION ON FRAUD, MANIPULATION, AND INSIDER TRADING:

 Unlawful acts connected with manipulation of security prices – it shall be unlawful for
any person acting for himself or through a broker or dealer, directly or indirectly:
o To create a false or misleading appearance of active trading in any listed security
traded in an Exchange of any other trading market:
  By effecting any transaction in such security which involves no change in
the beneficial ownership thereof
 Wash Sale – a term applied to the operation of simultaneously
buying and selling the same stock. There is no real exchange in
beneficial ownership in a wash sale.

 By entering an order or orders for the purchase or sale of such security

with the knowledge that a simultaneous order or orders of substantially the
same size, time and price, for the sale or purchase of any such security, has
or will be entered by or for the same or different parties
 Matched orders

 By performing similar act where there is no change in beneficial ownership.

o To affect, alone or with others, a securities or transactions in securities that:

 Raises their price to induce the purchase of a security, whether of the same
or a different class of the same issuer or of controlling, controlled, or
commonly controlled company by others
 Depresses their price to induce the sale of a security, whether of the same
or a different class, of the same issuer or of a controlling, controlled, or
commonly controlled company by others
 Creates active trading to induce such a purchase or sale through
manipulative devices such as:
 Marketing the Close – the buying and selling of securities at the
close of the market in an effort to alter the closing price of such
securities.

 Painting the tape – involves a series of transactions in securities

that are reported publicly to give the impression of activity or price
movement in a security

 Squeezing the float – is taking advantage of a shortage of

securities in the market by controlling the demand side and
exploiting market congestion during such shortages in a way as to
create artificial prices.

 Hype and dump – is engaging in buying activity at increasingly

higher prices and then selling securities in the market at the higher
prices.

 Boiler room operations – refer to activities out of low-rent offices

and which use high-pressure tactics (e.g. direct mail offers and
telephone follow-ups) typically involving misrepresentations
concerning the securities being sold.

 Such other similar devices (e.g. creation of temporary funds for the
purpose of engaging in other manipulative devices)

o To circulate or disseminate information that the price of any security listed in an

Exchange will or is likely to rise or fall because of manipulative market
operations of any one or
 more persons conducted for the purpose of raising or depressing the price of the
security for the purpose of inducing the purpose of sale of such security.

o To make false or misleading statement with respect to any material fact, which he
knew or had reasonable ground to believe was so false or misleading, for the
purpose of inducing the purchase or sale of any security listed or traded in an
Exchange.

o To effect, either alone or others, any series of transactions for the purchase and/or
sale of any security traded in an Exchange for the purpose of pegging, fixing or
stabilizing the price of such security; unless otherwise allowed by this Code or by
rules of the Commission.

 Other prohibitive acts constituting Manipulative or Deceptive Devices:

o No person shall use or employ, in connection with the purchase or sale of any
security any manipulative or deceptive device or contrivance.

o Neither shall any short sale be effected nor any stop-loss order be executed in
connection with the purchase or sale of any security except in accordance with
such rules and regulations as the Commission may prescribe as necessary or
appropriate in the public interest for the protection of investors.
 Short Sale – is a contract for sale of shares of stock which the seller does
not own, or certificates which are not within his control, so as to be
available for delivery at the time when delivery must be made.

 Stop-loss Order – is the instruction by a customer to his broker that if

they commodity reaches the price named, the broker shall close the trade
at the best available price, thus minimizing his losses.

 Rules for the regulation of Option Trading:

o Options – are contracts giving their holders the right to buy or sell a stated
number of shares of a particular security issued at a fixed price within a pre-
determined time period.
 He may or may not exercise the option depending on what is
advantageous to him.
 If he does not exercise his option, he simply loses the price he paid for his
option.

o No member of an Exchange shall, directly or indirectly endorse or guarantee the

performance of any put, call, straddle, option or privilege in relation to any
security registered on a securities exchange.

o The terms "put", "call", "straddle", "option", or "privilege" shall not include any
registered warrant, right or convertible security.
 Put – is a contract by which one of the parties thereto purchases at a fixed
sum the privilege to sell a certain stock within a definite period of time. It
gives the purchaser of the right the privilege to make the seller (of the
option) buy from him a given number of shares of a named stock within a
given time at a stipulated price.
  Call – is an option or right to buy a certain amount of securities at a fixed
price at or within a certain time agreed on. It entitles the buyer the right to
compel the seller (of the option) to deliver to him a certain number of
shares within a given time at a stipulated price.

 Straddle – means the double privilege of a put and a call, and secures to
the holder the right to demand of the seller (of the option) to buy a certain
price within a certain time a certain number of specified stock, or to require
him to take (i.e. sell), at the same price within the same time, the same
shares of stock. It is not per se a gaming contract, unless intended as a
mere cover for a bet or wager on the future price of the stock commodity.

 Fraudulent Transactions:
o It shall be unlawful for any person, directly or indirectly, in connection with the
purchase or sale of any securities to:
 Employ any device, scheme, or artifice to defraud
 Obtain money or property by means of any untrue statement of a material
fact of any omission to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were
made, not misleading
 Engage in any act, transaction, practice or course of business which
operates or would operate as a fraud or deceit upon any person

 Unlawful acts of an insider

o It shall be unlawful for an insider to sell or buy a security of the issuer, while in
possession of material information with respect to the issuer or the security that is
not generally available to the public, unless:
 The insider proves that the information was not gained from such relationship
 If the other party selling to or buying from the insider (or his agent) is
identified, the insider proves:
 that he disclosed the information to the other party
 that he had reason to believe that the other party otherwise is also
in possession of the information

 Prohibited acts of an insider when trading:

o Insiders should not take advantage of their positions in their own companies about
developments which might influence the price of their company’s shares.
o It shall be unlawful for any insider to communicate material nonpublic information
about the issuer or the security to any person who, by virtue of the
communication, becomes an insider as defined in Subsection 3.8, where the insider
communicating the information knows or has reason to believe that such person
will likely buy or sell a security of the issuer whole in possession of such
information.
 Information is “material nonpublic” if:
 It has not been generally disclosed to the public
 o and would likely affect the market price of the security
after being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information
o or would be considered by a reasonable person important
under the circumstances in determining his course of action
whether to buy, sell or hold a security.

SEC vs Interport Resources; 567 SCRA 354 (2008)

The provision explains in simple terms that the insider’s misuse of nonpublic and
undisclosed information is the gravamen of illegal conduct. The intent of the law
is protection of investors against fraud, committed when an insider, using secret
information, takes advantage of an uninformed investor.

PROVISIONS FOR THE PROTECTION OF SHAREHOLDER’S INTERESTS

 Tender Offer – a publicly announced offer by a person acting alone or in concert with
others to buy the shares of a public company at the terms specified in the offer.
o It is classified as MANDATORY TENDER OFFER whenever any person or
group of persons intends to acquire:
 15% or more of the equity of
 a listed corporation
 one with assets of at least P50 million with 200 or more
shareholders, 200 of whom own at least 100 shares each
 30% or more of the equity of such corporation over a period of 12 months
(“creeping acquisitions”) as the case may be
 An acquisition that will result in ownership of more than 50% of such
corporation.
 Under the circumstances specified above, he shall make a tender
offer to stockholders under terms specified in the offer by filing
with the SEC a declaration to this effect.
Note:
 The limits of 15% and 30% have been increased to 35% (SEC Memorandum
Circular No. 12, series of 2003)
 If the security is oversubscribed, the seller of the securities share pro-rata.
 Purpose of Tender Offer Rules: protection of the interests particularly of the
minority stockholders of a target company.

Osmeña III vs SSS; 533 SCRA 313 (2007)

Tender offer is in place to protect the interests of minority stockholders of the target
company against any scheme that dilutes the share value of their investments. It affords
such minority shareholders the opportunity to withdraw or exit from the company under
reasonable terms, a change to sell their shares at the same price as those of the majority
stockholders.

o A person will be making a VOLUNTARY TENDER OFFER where some or all

of the following factors are present:
 Active and widespread solicitation of public shareholders for the shares of a
public company
  Solicitation made for a substantial percentage of the issuer’s stock
 Offer to purchase is made at a premium over the prevailing market price,
at firm rather than negotiable terms
 An offer is contingent on the tender of a fixed number of shares
 Offer is only open for a limited period of time
 Restriction on proxy solicitations
 Requirements for internal record keeping and accounting controls
 Filing requirements of directors, officers, or principal stockholder’s
transactions,
with respect to public company where they obtain more than 10% of stock

 Limitations of Proxy Solicitations

o Proxies must be issued and proxy solicitation must be made in accordance with
rules and regulations to be issued by the Commission
o Proxies must be in writing, signed by the stockholder or his duly authorized
representative and file before the scheduled meeting with the corporate secretary
o Unless otherwise provided in the proxy, it shall be valid only for the meeting for
which it is intended. No proxy shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than five (5)
years at one time
o No broker or dealer shall give any proxy, consent or any authorization, in respect
of any security carried for the account of the customer, to a person other than the
customer, without written authorization of such customer
o A broker or dealer who holds or acquire the proxies for at least ten percent (10%)
or such percentage as the Commission may prescribe of the outstanding share of
such issuer, shall submit a report identifying the beneficial owner within ten (10)
days after such acquisition, for its own account or customer,
 to the issuer of the security
 to the Exchange where the security is traded
 to the SEC

 Disclosure Rule – All companies, listed or applying for listing, are required to divulge
truthfully and accurately, all material information about themselves and the securities
they sell for protection of the investing public, and under pain of administrative, criminal,
and civil sanctions. (Philippine Stock Exchange v. Securities and Exchange Commission,
et. al., G.R. No.125469, October 27, 1998