contract, instrument, whether written or
SECURITIES REGULATION CODE
RA 8799
Nature of the Securities Regulation Code
(SRC)
The SRC is the law that regulates
securities (its issuance, distribution and
sale) and the person who deals with such
securities. It is enacted to protect the
public from unscrupulous promoters, who
stake business or venture claims which
have really no basis, and sell shares or
interests therein to investors. It also
serves to protect investors, promote
investor confidence, and stabilize the
financial markets.
The law does not guarantee that a
person who invests in securities will make
money. The law only ensures that there
will be a fair and full disclosure of
information regarding securities so that the
investor could make an informed judgment.
(Divina, 2014)
State policy with regard to the SRC
1. Establish a socially-conscious free
market that regulates itself.
2. Encourage widest participation of
ownership in enterprises.
3. Enhance democratization of wealth.
4. Promote development of the capital
market.
5. Protect investors.
6. Ensure full and fair disclosure about
securities.
7. Minimize, if not totally eliminate, insider
trading and other fraudulent
manipulative devices and practices which
creates distortion in the free market.
DEFINITION OF SECURITIES
Securities are shares, participation
or interests in a corporation or in a
commercial enterprise or profit-making
venture and evidenced by a certificate,
electronic in character.
KINDS OF SECURITIES
1. Debt instruments – bonds, debentures,
notes, evidence of indebtedness, asset-
backed securities.
Asset-backed securities (ABS) -
These are financial securities the value of
which depends on the assets underlying it.
For investors, ABS are alternative to
investing in corporate debt. An ABS is
essentially the same thing as a mortgage-
backed security, except that the securities
backing it are assets such as loans, leases,
credit card debt, a company’s receivables,
royalty and so on, and not mortgaged-
based securities, hence, the risk involved
in ABS is greater.
2. Other instruments as may in the future
be determined by the SEC.
3. Derivatives– options and warrants
Options– are contracts that give the buyer
the right, but not the obligation, to buy or
sell an underlying security at a
predetermined price called the exercise or
strike price, on or before a predetermined
date, called the expiry date, which can only
be extended in accordance with Exchange
rules. (Sundiang Sr. & Aquino, 2014)
Kinds of Options
a. Call option – option to buy
b. Put option – option to sell
c. Straddle – combination of both call and
put option.
or
Warrants - are rights to subscribe or
purchase new shares or existing shares in
a company, on or before a predetermined
date called the expiry date, which can only
be extended in accordance with Exchange
rules. Warrants generally have a longer
exercise period than options.
4. Investments instruments – Investment
contracts, fractional undivided interests in
oil, gas, or other mineral rights.
Investment contract – is a contract,
transaction or scheme whereby a person
invests his money in a common enterprise
and is led to expect profits primarily from
the efforts of others.
Howey Test
For an investment contract to exist,
the following elements must concur:
a. A contract, transaction or scheme;
b. An investment of money;
c. Investment is made in a common
enterprise;
d. Expectation of profits; and
e. Profits arising primarily from the effort
of others.
Network marketing - a scheme adopted by
companies to get people to buy their
products outside the usual retail system
where products are brought from the
store’s shelf and where the buyer can
become a down-line seller, earning
commissions from purchases made by new
buyers whom he refers to the person who
sold the product to him, is not an
investment contract. The commissions are
incentives to down-line sellers to bring in
other customers. These can hardly be
regarded as profits from investment of
money under the Howey Test.
(SEC v. Prosperity.Com, Inc., G.R. No.
164197, January 25, 2012)
5. Equity instruments – Shares of stock,
certificates of interest or participation in a
profit sharing agreement, certificates of
deposit for a future subscription,
proprietary or non-proprietary membership
certificates in corporations.
6. Trust instruments – Certificates of
assignments, certificates of participation,
trust certificates, voting trust certificates
or similar instruments. [SRC, Sec. 3.1 (e)]
---
CASE SAMPLE
Q: Betty Go Gabionza and other investors
lent, invested or deposited money with
ASBHI. For this, ASBHI issued two (2)
postdated checks to its lenders, one
representing the principal amount and the
other covering the interest thereon. On the
maturity of the checks, the individual
lenders renewed the loans, either
collecting only the interest earnings or
rolling over the same with the principal
amounts. After sometime, DBS Bank
refused to pay for the
checks by virtue of “stop payment” orders
from ASBHI. The series of events led to
the filing of the complaints by Gabionza, et
al., for Estafa under Article 315(2)(a) and
(2)(d) of the Revised Penal Code, Estafa
under PD No. 1689, violation of the
Revised Securities Act and violation of the
General Banking Act. The DOJ concluded
that ASHBHI, et al., are liable for violating
such prohibition against the sale of
unregistered securities. However, the CA
reversed the
DOJ holding that the postdated checks
issued by ASBHI did not constitute a
security under the Revised Securities Act.
Are the checks issued by ASHBHI
“securities”?
A: YES. The checks issued constitute
securities; hence, the non-registration
thereof is a violation of the Revised
Securities Act. It is one thing for a
corporation to issue checks to satisfy
isolated individual obligations, and another
for a corporation to execute an elaborate
scheme where it would portray itself to the
public as a pseudoinvestment house and
issue postdated checks instead of stocks or
traditional securities to evidence the
investments of its patrons. The Revised
Securities Act is geared towards the
maintainance of the stability of the national
investment market against activities such
as those apparently engaged in by ASBHI.
ASBHI adopted this scheme in an attempt
to circumvent the Revised Securities Act,
which requires a prior license to sell or
deal in securities. It bears pointing out that
the definition of “securities” set forth in
Section 2 of the Revised Securities Act
includes “commercial papers evidencing
indebtedness of any person, financial or
non-financial entity, irrespective of
maturity, issued, endorsed, sold,
transferred or in any manner conveyed to
another. A check is a commercial paper
evidencing indebtedness of any person,
financial or non-financial entity. Since the
checks in this case were generally rolled
over to augment the creditor’s existing
investment with ASBHI, they most
definitely take on the attributes of
traditional stocks. A different rule would
open the floodgates for a similar scheme,
by companies without prior license or
authority from the SEC. This cannot be
countenanced. (Gabionza v. CA, G.R. No.
161057, September 12, 2008)
---
Test on determining whether or not it is a
security
Does it represent a share,
participation, or interest in a commercial
enterprise or any profit making venture? If
yes, then, it is a security. If it is a security,
then, it cannot be sold, or offered for sale
or distribution within the Philippines
without a registration statement duly filed
with and approved by the SEC. (Divina,
2014)
Requirement before securities are sold or
offered for sale or distribution within the
Philippines
They are required to be registered
with and approved by the SEC. Registration
also includes the disclosure to SEC of all
material and relevant information about the
issuer of the security. Prior to the sale, the
information on the securities, in such form
and with such substance as the SEC may
prescribe, shall be made available to each
prospective purchaser. (SRC, Sec. 8.1)
GR: Securities must be registered with and
approved by SEC.
REASON: To protect the public from fraud.
XPNs: The following need not be
registered:
1. Exempt securities; and
2. Securities sold in exempt transactions.
XPN TO XPN: SRC provides that the resale
of securities previously sold in an exempt
transaction must be registered.
Effect of non-registration
The issuer would be penalized. Issuers of
securities not registered shall be subjected
to criminal, civil and administrative
charges.
---
CASE SAMPLE
Q. ABC Corp. is engaged in the pawnshop
business involving cell phones, laptops and
other gadgets of value. In order to expand
its business and attract investors, it offered
to any person who invests at least
P100,000.00 a “promissory note” where it
obligated itself to pay the holder a 50%
return on investment within one month.
Due to the attractive offer, many
individuals invested in the company but not
one of them was able to realize any profit
after one month. Has ABC Corp. violated
any law with its scheme? Explain.
A: YES. ABC Corp. violated the provisions
of the Securities Regulation Code that
prohibits sale of securities to the public,
like promissory, without a registration
statement filed with and approved by the
Securities and Exchange Commission.
---
Q: Timeshare Corp. sold to Spouses Cortez
one timeshare of Laguna de Boracay. After
sometime, the SEC issued a resolution to
the effect that Timeshare Corp. was
without authority to sell securities, like
timeshares. It held therefore that the
purchaser may
exercise the option to unilaterally rescind
the purchase agreement and receive the
refund of money paid applies to all
purchase agreements entered into by
Timeshare Corp. prior to the effectivity of
the Registration Statement. Hence,
Spouses Cortez demanded their right to
cancel their contract, as it appears that
Laguna de Boracay is selling said shares
without license or authority from the SEC.
Despite repeated demands, Timeshare
Corp. failed
and refused to refund the same. Timeshare
Corp. contends that its mere registration as
a corporation already authorized it to deal
with unregistered timeshares. Does the
registration of Timeshare Corp. as a
corporation authorize it to deal with
unregistered timeshares?
A: NO. Mere registration as a corporation
does not authorize it to deal with
unregistered timeshares. Corporate
registration is just one of several
requirements before it may deal with
timeshares. Prior to fulfillment of all the
other requirements of Section 8,
Timeshare Corp. is absolutely proscribed
from dealing with unregistered timeshares.
No securities, except of a class exempt
under the SRC or unless sold in any
transaction exempt under the same, shall
be sold or offered for sale or distribution to
the public within the Philippines unless
such securities shall have been registered
and permitted to be sold as provided by the
SRC. (Timeshare Realty Corporation v.
Cesar Lao, G.R. No. 158941, February 11,
2008)
---
Validity of the sale of shares acquired 12
months after the approval of the
Registration Statement
If the person who acquired the
security sued any of the enumerated
persons under Sec. 56.1 for recovery of
damages after the issuer has made
generally available to its security holders
an income statement covering a period of
at least twelve (12) months beginning from
the effective date of the registration
statement, then the right of recovery shall
be conditioned on proof that such person
who acquired the security relying upon
such untrue statement in the registration
statement or relying upon the registration
statement and not knowing of such income
statement, but such reliance may be
established without proof of the reading of
the registration statement by such person.
(SRC, Sec. 56.2)
Securities market professionals (persons
who deal with securities)
1. Broker – A person engaged in the
business of buying and selling securities
for the account of others. (SRC, Sec.3.3)
2. Dealer– Any person who buys and sells
securities for his/her own account in the
ordinary course of business. (SRC, Sec.
3.4)
3. Associated person of a broker or dealer
– He is an employee of a broker or dealer
who directly exercises control of
supervisory authority, but does not include
a salesman, or an agent, or a person,
whose functions are solely clerical or
ministerial. (SRC, Sec. 3.5)
4. Salesman – He is a natural person,
employed as such, or as an agent, by a
dealer, issuer or broker to buy and sell
securities; but for the purpose of
registration, shall not include any employee
of an issuer whose compensation is not
determined directly or indirectly on sales
of securities of the issuer.(SRC, Sec 3.13)
Obligation of the broker to his client
The primary obligation of the broker
is to ensure his account’s compliance with
the law. (Abacus Securities Corp. v. Ampil,
G.R. No. 160922, February 27, 2006)
NOTE: Since a brokerage relationship is
essentially a contract for the employment
of an agent, the law on contracts governs
the broker-principal relationship.
Registration of security market
professionals
Security market professionals are
required to be registered. No broker shall
sell any securities unless he is registered
with the SEC. (Revised Securities Act, Sec.
1,) (Nicolas v. CA, et al., G.R. No. 12285,
March 27, 1998)
---
Q: Can a stock broker without license from
the SEC, recover management fees
allegedly earned from handling the
securities transactions of a client?
A: NO. An unlicensed person may not
recover compensation for services as a
broker where a statute or ordinance is
applicable and such is of a regulatory
nature.
---
EXEMPT SECURITIES
EXEMPT SECURITIES
1. Any security issued or guaranteed by
the Government of the Philippines, or by
any political subdivision or agency thereof,
or by any person controlled or supervised
by, and acting as an instrumentality of said
government.
2. Any security issued or guaranteed by
the government of any country with which
the Philippines maintains diplomatic
relations, or by any state, province or
political subdivision thereof on the basis of
reciprocity. Provided, that the SEC may
require compliance with the form and
content of disclosures the Commission may
prescribe.
3. Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by the
proper adjudicatory body.
4. Any security or its derivatives the sale
or transfer of which, by law, is under the
supervision and regulation of the Office of
Insurance Commission, Housing and Land
Use Regulatory Board, or the Bureau of
Internal Revenue.
5. Any security issued by a bank except its
own shares of stock (which serves to
promote the sale of securities issued by
heavily regulated banks).
6. Other securities as determined by the
SEC by rule or regulation, after public
hearing. (SRC, Sec. 9)
Being an issuer of an exempt
security does NOT exempt such issuer
from the requirement of submission of
reports under the regime of full and fair
disclosure.
RATIONALE: The listed securities are
exempted because they are either
guaranteed by the government or they are
already regulated by another government
agency or body other than the SEC.
EXEMPT TRANSACTIONS
EXEMPT TRANSACTIONS
1. Any judicial sale, or sale by an executor,
administrator, guardian, receiver or trustee
in insolvency or bankruptcy.
2. Those sold by a pledge holder,
mortgagee, or any other similar lien holder,
to liquidate a bona fide debt a security
pledged in good faith as security for such
debt.
3. Those sold or offered for sale in an
isolated transaction for the owner’s
account and the owner not being an
underwriter.
4. Distribution by the corporation of
securities to its stock holders or other
security holders as stock dividends or
distribution out of surplus.
5. Sale of capital stock of a corporation to
its own stockholders exclusively wherein
no commission or remuneration is paid or
given directly or indirectly in connection
with the sale of such capital stock.
NOTE: Also, this sale must not involve an
underwriter or financial advisor.
6. Bonds or notes secured by a mortgage
upon real estate or tangible personal
property, where the entire mortgage
together with all the bonds or notes
secured thereby are sold to a single
purchaser at a single sale.
7. Issue and delivery of any security in
exchange for any other security of the
same issuer pursuant to the right of
conversion entitling the holder of the
security surrendered in exchange to make
such conversion.
8. Broker’s transactions executed upon
customer’s orders, on any registered
Exchange or other trading market.
9. Share subscriptions in capital stock prior
to incorporation or in pursuance of an
increase in its authorized capital stock
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 subscriptions 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
increased.
10. Exchange of securities by the issuer
with its existing security holders
exclusively, when no commission or other
remuneration is paid or given directly or
indirectly for soliciting such exchange.
11. Sale by issuer to fewer than 20 persons
in the Philippines during any 12 month
period, otherwise known as private
placement transactions.
Requisites:
1. Sale to not more than 19 non-
institutional retail investors;
2. The security is made payable to a
specific person;
3. Security is non-negotiable and
nonassignable; and
4. It is in an amount not exceeding fifty
(50) million pesos.
12. Sale of securities to any number of the
following Qualified Buyers:
a. banks;
b. registered investment houses;
c. insurance companies;
d. pension funds or retirement plans
maintained by the Government of the
Philippines or any political subdivision
thereof or managed by a bank or other
persons authorized by the Bangko Sentral
to engage in trust functions, investment
companies;
e. investment companies; and
f. other persons or entities ruled qualified
by the SEC on the basis of such factors
such as financial sophistication, net worth,
knowledge, and experience in financial and
business matters, or amount of assets
under management. (SRC, Sec. 10.1)
RATIONALE: Although the securities
themselves must still be registered, the
sale or issue need not be registered
because the investors involved herein are
considered as highly sophisticated
investors or specialized investors and as
such, have a greater risk tolerance or do
not need strict protection from the
Commission.
NOTE: List of exempt transactions under
SRC is NOT exclusive
The list is not exclusive. The
Commission may exempt other
transactions, if it finds that the
requirements of registration under the
Code is not necessary in the public interest
or for the protection of the investors such
as by reason of the small amount involved
or the limited character of the public
offering. (SRC, Sec. 10.02)
NON-EXEMPT
NOT EXEMPT
All securities, unless specifically
exempted by law, shall not be sold or
offered for sale or distribution within the
Philippines, without a registration
statement duly filed with and approved by
the Commission. (SRC, Sec. 8.1)
Purpose for registration of securities
Registration of securities allows the
subsequent release of these securities to
the investing public and serves to protect
investors.
Procedure for registration of securities
1. Application – All securities required to
be registered shall be registered through
the filing by issuer with SEC, of a sworn
registration statement with respect to such
securities in such form and containing such
information or documents as the
Commission shall prescribe.
2. Prospectus – The registration statement
shall include any prospectus required or
permitted to be delivered.
3. Other information– The information
required for the registration of any kind
and all securities shall include, among
others, the effect of the securities’ issue
on ownership, on the mix of ownership,
especially foreign and local ownership.
4. Signatories to registration statement–
The registration statement shall be signed
by the issuer’s:
a. Executive officer
b. Principal operating officer
c. Principal financial officer
d. Comptroller
e. Principal accounting officer
f. Corporate secretary or persons
performing similar functions
NOTE: It shall be accompanied by a duly
verified resolution of the Board of
Directors of the issuer corporation.
5. Written consent of Expert – The written
consent of the expert named as having
certified any part of the registration
statement or any document used in
connection therewith shall also be filed.
6. Certification by selling stockholders–
Where the registration statement includes
shares to be sold by the selling
shareholders, a written certification by
such selling shareholders as to the
accuracy of any part of the registration
statement contributed by such selling
shareholders shall also be filed.
7. Fees – Upon filing of the registration
statement, the issuer shall pay to the SEC
a fee of not more than one tenth of one
percent (1/10 of 1%) of the maximum
aggregate price at which such securities
are proposed to be offered; the SEC shall
prescribe by rule, diminishing the fees in
inverse proportion, the value of the
aggregate price of the offering.
NOTE: This fee paid to the SEC is called a
diminishing fee.
8. Notice and Publication – Notice of the
filing of the registration statement shall be
immediately published by the issuer, at its
own expense, in two newspapers of
general circulation in the Philippines; once
a week for two consecutive weeks, or in
such other manner as the Commission by
rule shall prescribe, reciting that:
a. A registration statement for the sale of
such security has been filed;
b. The aforesaid registration statement as
well as the papers attached thereto is open
to inspection at the Commission during
business hours; and
c. Copies thereof, photo static or
otherwise, shall be furnished to interested
parties at such reasonable charges as the
Commission may prescribe.
9. Ruling – Within 45 days after the date of
the filing of the registration statement, or
by such later date to which the issuer has
consented, the SEC shall declare the
registration statement effective or
rejected, unless the applicant is allowed to
amend the registration statement. The
Commission shall enter an order declaring
the registration statement to be effective if
it finds that the registration statement
together with all the other papers and
documents attached thereto is on its face
complete and that the requirements have
been complied with. The Commission may
also impose such terms and conditions as
may be necessary or appropriate for the
protection of the investors.
10. Effectivity – Upon effectivity of the
registration statement, the issuer shall
state under oath in every prospectus that
all registration requirements have been
met and that all information are true and
correct as represented by the issuer or the
one making the statement.(SRC, Sec. 12)
NOTE: Any untrue statement or fact of
omission to state a material fact required
to be stated therein or necessary to make
the statement therein not misleading shall
constitute fraud.
Grounds for rejection of a registration
statement and revocation of the effectivity
of a registration statement and the
registration of a security
After due notice and hearing by
issuing an order to such effect, the
Commission may reject the registration
statement or revoke the registration of a
security based on the following grounds:
1. The issuer:
a. Has been judicially declared insolvent;
b. Has violated any of the provisions of the
Code, the rules promulgated pursuant
thereto, or any order of the SEC of which
the issuer has notice in connection with the
offering for which a registration statement
has been filed;
c. Has been or is engaged or is about to
engage in fraudulent transactions;
d. Has made any false or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities; or
e. Has failed to comply with any
requirement that the Commission may
impose as a condition for registration of
the security for which registration
statement has been filed.
2. The registration statement is on its face
incomplete or inaccurate in any material
respect or includes any untrue statement of
a material fact or omits to state a material
fact required to be stated therein or
necessary to make the statements therein
not misleading;
3. The issuer, any officer, director or
controlling person of the issuer, or any
person performing similar functions, or any
underwriter has been convicted by a
competent judicial or administrative body,
upon plea of guilty, or otherwise, of an
offense involving moral turpitude and/or
fraud or is enjoined or restrained by the
SEC or other competent judicial or
administrative body for violations of
securities, commodities and other related
laws; and
4. Any issuer who refuses to permit the
examination to be made by the
Commission. (SRC, Sec. 13)
NOTE: The Commission may compel the
production of all the books and papers of
the issuer, and may administer oaths to,
and examine the officers of such issuer or
any other person connected therewith as to
its business and affairs.
Grounds for suspension of registration
1. If any time, the information contained in
the registration statement filed is or has
become misleading, incorrect, inadequate
or incomplete in any material respect.
2. The sale or offering for sale of the
security registered thereunder may work
or tend to work a fraud.
3. Pending investigation of the security
registered, if the Commission deems it
necessary, to ascertain whether the
registration of such security should be
revoked on any ground specified in the
SRC.
4. Refusal to furnish information required
by the Commission. (SRC, Sec. 15)
Grounds for suspension or cancellation of
certificate of registration
1. Fraud in procuring registration.
2. Serious misrepresentation as to
objectives of corporation.
3. Refusal to comply with lawful order of
SEC.
4. Continuous non-operation for at least 5
years.
5. Failure to file By-laws within required
period.
6. Failure to file reports.
7. Other similar grounds. (SRC, Sec. 6 [L])
Order of suspension by the SEC requires a
subsequent hearing
An order of suspension must be
followed by a hearing to be conducted by
the Commission. If the Commission
determines that the sale of any security
should be revoked, it shall issue an order
prohibiting the sale of such security. Until
the issuance of a final order, the
suspension of the right to sell, though
binding upon the persons notified thereof,
shall be deemed confidential, and shall not
be published, unless it shall appear that the
order of suspension has been violated after
notice. However, if the Commission finds
that the sale of the security will neither be
fraudulent nor result in fraud, it shall
forthwith issue an order revoking the order
of suspension, and such security shall be
restored to its status as a registered
security as of the date of such order of
suspension.
PROHIBITIONS ON FRAUD,
MANIPULATIONS AND INSIDER TRADING
MANIPULATION OF SECURITY PRICES
Acts which are considered as manipulation
of security prices
The price of securities should be
dictated by market forces. It cannot be
pegged or stabilized. The following acts
are considered as manipulation of security
prices and are therefore prohibited:
1. Transactions intended to create a false
or misleading appearance of active trading
in any listed security traded in an
Exchange or any other trading market:
a. Wash Sale – is a transaction in which
there is no genuine change in the beneficial
(or actual) ownership of a security;
b. Matched Sale – is a change of ownership
in the securities by entering an order for
the purchase or sale of a security with the
knowledge that a simultaneous order 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; or
c. Similar transactions where there is no
change of beneficial ownership.
2. Effecting a series of transactions that
will raise or depress the price of securities
to induce the purchase or sale of securities
respectively, or creating active trading to
induce transactions through manipulative
devices:
a. Marking the close – buying and selling of
securities at the close of the market in an
effort to alter the closing price of these
securities;
b. Painting the tape – engaging in a series
of transactions effected by brokers in
securities that are reported publicly to give
the impression or illusion of activity or
price movement in a security, which may
trick investors into trading in these
securities because of the alleged trading
volume or indications of interest;
c. Squeezing the float – refers to 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 to create artificial
prices. This prevents the actual market
from determining the price of these
securities;
d. Hype and dump – engaging in buying
activity at increasingly higher prices and
then selling securities in the market at the
higher prices;
e. Boiler room operations – refers to
activities that involve the use of high
pressure sale tactics such as direct mail
offers or telephone follow-ups to investors
to promote purchase and sale of securities
wherein there is misrepresentation in these
securities. This is a fraudulent transaction
that tricks investors into trading in a fake
market;
f. Daisy chain – refers to a series of
purchase and sales of the same issue at
successively higher prices by the same
group of people with the purpose of
manipulating prices are drawing
unsuspecting investors into the market
leaving them defrauded of their money and
securities;
g. Front-Running – is the prohibited
practice of a broker-dealer executing its
proprietary order before the customer’s
order for the same security. This violates
the fiduciary responsibility by the broker-
dealer to its customer accounts as well as
placing the customer’s order first; or
h. Churning – involves the excessive
trading of securities by a broker-dealer in
a customer’s discretionary account in order
to generate commissions, without regard to
the customer’s investment objective.
3. Circulating or disseminating 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 that security for the purpose of
inducing the purchase or sale of such
security.
4. 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.
5. To effect, either alone or with 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 the
Code or by rules of the Commission. (SRC,
Sec. 24)
Short sales
It is the selling of shares which the
seller does not actually own or possess
and therefore he cannot, himself, supply
the delivery. Short selling leads to
speculation of price of securities.
Short swing transaction
It is a transaction by the director,
issuer or any person controlling the issuer
(stockholder owning 10% of the stocks),
whereby such person buys and sells
securities within six (6) months.
FRAUDULENT TRANSACTIONS
The following are considered as fraudulent
transactions:
1. Employment of any device, scheme or
artifice to defraud investors;
2. Obtaining money or property by means
of any untrue statement of a material fact
or any omission to state a material fact
necessary in order to make the statement
made not misleading; and
3. Engaging in any act, transaction,
practice or course of business, which
operates as a fraud or deceit upon any
person.
Insider
A person who is in possession of
corporate material information not
generally available to the public.
Who may be an insider:
1. The issuer;
2. A director or officer (or person
performing similar functions) of, or a
person controlling the issuer;
3. 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;
4. A government employee, or 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; or
5. Constructive Insider – A person who
learns such information by a
communication from any of the foregoing
insiders. (SRC, Sec. 3.8)
Other prohibited acts in an insider trading
1. For an insider to communicate material
non-public information about the issuer or
the security to any person who by virtue of
the communication thereby becomes an
insider, where the original insider
communicating the information knows or
has reason to believe that such person will
likely buy or sell a security of the issuer
while in possession of such information.
(SRC, Sec. 27.3)
2. When a tender offer has commenced or
is about to commence, it is unlawful for any
person, other than the tender offeror, who
is in possession of material non-public
information relating to such tender offer to
buy or sell the securities of the issuer that
are sought or to be sought by such tender
offer, if such person knows or has reason
to believe that the information is non-
public and has been acquired directly or
indirectly from the tender offer, or those
acting on its behalf, the issuer of the
securities sought or to be sought by such
tender offer, or any insider of such issuer.
(SRC, Sec. 27.4 [a][i])
3. When a tender offer has commenced or
is about to commence, it is also unlawful
for any tender offeror, or those acting on
its behalf, the issuer of securities covered
by such tender offer, and any insider, to
communicate material non-public
information to any person relating to the
tender offer which would likely result in
violation of prohibition of the insider from
trading. (SRC, Sec. 27.4 [a][ii])
Material non-public information
1. Information about the issuer or the
security has not been generally disclosed
to the public 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; or
2. 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. (SRC, Sec.
27.2)
---
SAMPLE CASE
Q: Grand Gas Corporation, a publicly listed
company, discovered after extensive
drilling a rich deposit of natural gas along
the coast of Antique. For five (5) months,
the company did not disclose the discovery
so that it could quietly and cheaply acquire
neighboring land and secure mining rights
to the land. Between the discovery and its
disclosure of the information to the
Securities and Exchange Commission, all
the directors and key officers of the
company bought shares in the company at
very low prices. After disclosure, the price
of the shares went up. The directors and
officers sold their shares at huge profits.
a. What provision of the Securities
Regulation Code (SRC) did they violate, if
any? Explain.
b. Assuming that the employees of the
establishment handling the printing work of
Grand Gas Corporation saw the exploration
reports which were mistakenly sent to
their
establishment together with other materials
to be printed. They too bought shares in
the
company at low prices and later sold them
at huge profits. Will they be liable for
violation of the SRC? Why? (2008 Bar)
A:
a. The directors and officers of the
corporation violated Sec. 27 of the
Securities and Regulation Code on the
prohibition on insider’s trading. Sec. 27.1
of the Securities and Regulation Code
provides that 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. In this case, the directors and
officers fall squarely into the definition of
an insider under Sec. 3.8 of the Securities
and Regulation Code. Thus, the directors
and officers are liable for violating the
prohibition on Insider trading.
b. The said employees will also be liable
for engaging in insider trading. Sec. 3.8 of
the Securities and Regulation Code, an
insider is also a person whose relationship
or former relationship to the issuer gives
or gave him access to material information
about the issuer or security that is not
generally available to the public. The said
employees because of their relationship
with the issuer, Grand Gas Corporation as
their printer, where able to obtain material
information. They too became liable for
insider trading when they bought the
shares in the company and at the same
time possessing undisclosed material
information.
---
Possible defenses against insider trading
1. That the information was acquired not
on account of his relationship with the
issuer.
2. That he disclosed the information to the
other party who knew or had the reason to
believe he knew the material information.
3. That the purchaser or seller was not
aware of the material, non-public
information at the time of the purchase or
the sale.
PROTECTION OF INVESTORS
Provisions in the SRC intended to protect
the investors
1. Tender Offer Rule
2. Rules on Proxy Solicitation
3. Disclosure Rule
Tender offer means a publicly
announced intention by a person acting
alone or in concert with other persons to
acquire equity securities of a public
company. It is also an offer by the
acquiring person to stockholders of a
public company for them to tender their
shares therein on the terms specified in the
offer. (Cemco Holdings, Inc. v. National
Life Insurance Co, Inc. G.R. No. 171815,
August 7, 2007) It is an invitation by the
acquirer of shares of a company for other
stockholders to tender their shares to the
acquirer so that they may sell their shares
in the same price and conditions as the
previously acquired shares.
It is given to all stockholders by:
1. Filing with the SEC a declaration to that
effect, and paying the filing fee;
2. Furnishing the issuer a statement
containing the information required of the
issuers as SEC may prescribe, including
subsequent or additional materials; or
3. Publishing all requests or invitations for
tender, or materials making a tender offer
or requesting or inviting letters of such
security.
Purpose of tender offer
Tender offer is in place to protect
the interest of minority stockholders of a
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 or a chance to sell their shares at
the same price as those of the majority
stockholders.
Public company
1. Those listed on an exchange;
2. Those with assets of at least PHP 50M
and having 200 shareholders owning at
least 100 shares each; or
3. Those companies that have an effective
registration statement under Section 12 of
the SRC.
Mandatory tender offer
Tender offer is required to be made
when:
1. Any person or group of persons acting in
concert, who intends to acquire fifteen
percent (15%) of equity securities in a
public company in one or more transactions
within a period of twelve (12) months.
2. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares
that are sufficient to gain control of the
board in a public company in one or more
transactions within a period of twelve (12)
months. If the tender offer is
oversubscribed, the aggregate amount of
securities to be acquired at the close of
such tender offer shall be proportionately
distributed across selling shareholders with
whom the acquirer may have been in
private negotiations and other
shareholders. For purposes of SRC Rule
19.2.2, the last sale that meets the
threshold shall not be consummated until
the closing and completion of the tender
offer
NOTE: If the acquisition is made through
the Exchange trading system tender offer
is not required provided after acquisition
through the Exchange trading system, they
fail to acquire their target of thirty five
percent (35%) or such outstanding voting
shares that is sufficient to gain control of
the board.
3. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares
that are sufficient to gain control of the
board in a public company directly from
one or more stockholders. The sale of
shares pursuant to the private transaction
or block sale shall not be completed prior
to the closing and completion of the tender
offer.
4. Any acquisition that would result in
ownership of over fifty percent (50%) of
the total outstanding equity securities of a
public company.
NOTE: Tender offer shall be made at a
price supported by a fairness opinion
provided by an independent financial
advisor or equivalent third party. The
acquirer in such a tender offer shall be
required to accept all securities tendered.
(2015 SRC Rules, Sec. 19.2)
Coverage of the application of tender offer
The mandatory tender offer rule
covers not only direct acquisition but also
indirect acquisition or “any type of
acquisition.” The legislative intent of
Section 19 of the Securities Regulation
Code is to regulate activities relating to
acquisition of control of the listed company
and for the protection of the minority
stockholders of a listed corporation.
Whatever may be the method by which
control of a public company is obtained,
either through the direct purchase of its
stocks or through an indirect means,
mandatory tender offer applies. What is
decisive is the determination of the power
of control. The legislative intent makes
clear that the type of activity intended to
be regulated is the acquisition of control of
the listed company through the purchase of
shares. Control may be effected through a
direct and indirect acquisition of stock, and
when this takes place, irrespective of the
means, a tender offer must occur. (Cemco
Holdings Inc. v. National Life Insurance
Co.Inc., G.R. No. 171815, August 7, 2007)
Illustration of the application of tender
offer in direct acquisition:
The shares of stock of X company
are owned by A (19%), B (16%), C (20%),
D (14%), E (31%). If Aljon buys the shares
of A (19%), the transaction is not subject to
mandatory tender offer. However, if Aljon
buys the shares of A (19%) and the shares
of B (16%), then tender offer must be made
because the total shares bought by Aljon is
35%.
Illustration of the application of tender
offer in indirect acquisition:
The shares of stock of X company
are owned by A (16%), B (19%), C (15%),
D (18%), and Corporation E (32%)
respectively. The shares of Corporation E
are owned by Kenneth (50%), King (25%)
and Jacq (25%). If Aljon acquires the
shares of B (19%), the transaction is not
subject to mandatory tender offer because
it did not reach the 35% threshold limit
required by law. However, if Aljon acquires
the shares of B (19%) and the shares of
Kenneth in Corporation E (50% of 32 is
16%), then, tender offer must be made
because the total shares bought by Aljon
directly and indirectly is 35%.
Obligations of person making a tender offer
1. Make an announcement of his intention
in a newspaper of general circulation, prior
to the commencement of the offer.
2. At least (2) business days prior to the
date of the commencement of the tender
offer:
a. File with the SEC a required form for
tender offer including all exhibits thereto
(and any amendments thereto), with the
prescribed filing fees; and
b. Hand deliver a copy of such form
including all exhibits (and amendments
thereto) to the target company and its
principal executive office and to each
Exchange where such class of target
company’s securities are listed for trading.
3. Report the results of the tender offer by
filing with the SEC, not later than ten (10)
calendar days after the termination of the
tender offer, copies of the final
amendments to the form. (Sundiang Sr. &
Aquino, 2014)
Unlawful and prohibited acts relating to
tender offers
It shall be unlawful for any person
to:
1. Make any untrue statement of a material
fact or omit to state any material fact
necessary in order to make statements
made, in the light of the circumstances
under which they are made, not misleading;
or
2. Engage in any fraudulent, deceptive, or
manipulative acts or practices, in
connection with any tender offer or request
or invitation for tenders, or any solicitation
of security holders in opposition to or in
favor of any such offer, request, or
invitation.
Margin trading
A kind of trading that allows a broker
to advance for the customer/investor part
of the purchase price of the security and to
keep the same security as collateral for
such advance.
Margin allowance standard
GR: The credit extended must be for an
amount not greater than, whichever is
higher of:
1. 65% of the current market price of the
security; or
2. 100% of the lowest market price during
the preceding 36 calendar months, but not
more than 75% of the current market price.
XPN: The Monetary Board may increase or
decrease the above percentages, in order
to achieve the objectives of the
Government with due regard for promotion
of the economy and prevention of the use
of excessive credit.
Purposes of the margin requirements
They are primarily intended to
achieve a macroeconomic purpose – the
protection of the overall economy from
excessive speculation in securities. Their
recognized secondary purpose is to protect
small investors.
Burden of compliance with margin
requirements
The brokers and dealers have the
burden of compliance with margin
requirements.
NOTE: In securities trading, the brokers
are essentially the counterparties to the
stock transactions at the Exchange. Since
the principals of the broker are generally
undisclosed, the broker is personally liable
for the contracts thus made. Brokers have
a right to be reimbursed for sums advanced
by them with the express or implied
authorization of the principal. (Abacus
Securities Corp.v. Ampil, G.R. No. 160016,
February 27, 2006)
RULES ON PROXY SOLICITATION
Requisites for valid proxy solicitation
1. It must be in writing.
2. It must be signed by the stockholder or
his duly authorized representative.
3. It must be filed before the scheduled
meeting with the corporate secretary.
(SRC, Sec. 20.2)
NOTE: For public companies, the period to
submit proxy solicitation should not be
later than five (5) days before the meeting
unless the by-laws provides for a longer
period. Unless otherwise provided in the
proxy, the 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.
Rules on proxy solicitation with regard to
broker or dealer
1. No broker or dealer shall give any
proxy, consent or authorization, in respect
of any security carried for the account of a
customer, to a person other than the
customer, without the express written
authorization of such customer.
2. A broker or dealer who holds or
acquires the proxy for at least 10% or such
percentage as the Commission may
prescribe of the outstanding share of the
issuer, shall submit a report identifying the
beneficial owner within 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
and to the Commission. (SRC, Sec. 20.4,
20.5)
Jurisdiction over violations of the SEC
rules on proxy solicitation
The power of the SEC to investigate
violations of its rules on proxy solicitation
is unquestioned when proxies are obtained
to vote on matters unrelated to the cases
enumerated under Section 5 of PD 902-A.
However, when proxies are solicited in
relation to the election of corporate
directors, the resulting controversy, even
if it ostensibly raised the violation of the
SEC rules on proxy solicitation, should be
properly seen as an election controversy
within the jurisdiction of the RTC special
commercial court. (GSIS vs. CA, G.R. Nos.
183905 and 184275, April 16, 2009)
DISCLOSURE RULE
Beginning of disclosure requirement
It begins at registration and
continues periodically through the regular
filing of periodic report.
Suspension of disclosure
It may be suspended for any fiscal
year after the year such registration
became effective if such issuer as of the
first day of any such fiscal year, has less
than 100 shareholders of such class of
securities and it notifies the Commission of
such. (SRC IRR, Rule 17.1)
End of disclosure requirement
GR: Disclosure does not end because once
an issuer becomes a reporting company, it
remains as such even when the registration
of securities has been revoked. (SRC IRR,
Rule 13)
XPN: If the primary license is revoked.
XPN to the XPN: In the case of hospitals
and educational institutions if the primary
license is revoked, the disclosure
requirement still continues because of
public interest.
Reportorial requirements
1. Issuers:
a. Shall file with the Commission within 135
days, after the end of the issuer’s fiscal
year, or such other time as the Commission
may prescribe, an annual report which shall
include among others, a balance sheet,
profit and loss statement and statement of
cash flows, for such last fiscal year,
certified by an independent certified public
accountant, and a management discussion
and analysis of results of operations; and
b. Such other periodical reports for interim
fiscal periods and current reports on
significant developments of the issuer as
the Commission may prescribe as
necessary to keep current information on
the operation of the business and financial
condition of the issuer. (SRC, Sec. 17)
2. Types of issuers required to file
reports:
a. An issuer which has sold a class of its
securities pursuant to a registration
statement under Section 12 of the SRC;
b. An issuer with a class of securities listed
for trading in an Exchange;
c. An issuer with assets of at least PHP
50M and having 200 or more holders each
holding at least 100 shares
3. Persons acquiring securities - If the
issuer is one that has to make a report, any
person who acquires directly or indirectly
the beneficial ownership of more than 5%
of such class, or in excess of such lesser
per centum as the Commission by rule may
prescribe, shall, within 10 days after such
acquisition or such reasonable time as
fixed by the Commission, submit to the
issuer of the security, to the Exchange
where the security is traded, and to the
Commission a sworn statement containing:
a. His personal circumstances
b. The nature of such beneficial ownership
c. If the purpose was to acquire control of
the business, any plans the recipient may
have affecting a major change in the
business
d. The number of shares beneficially
owned, and the number of shares for which
there is a right to acquire
e. granted to such person or his associates
f. Information as to any agreement with a
third person regarding the securities (SRC,
Sec. 18)
4. Persons that has beneficial ownership of
10% or more
- Every person who is directly or
indirectly the beneficial owner of more
than 10% of any class of any equity
security, or who is director or an officer of
the issuer of such security, shall file:
a. Statement with the SEC and, if such
security is listed for trading on an
Exchange, also with the Exchange, of the
amount of all equity securities of such
issuer of which he is the beneficial owner;
b. Within 10 days after the close of each
calendar month, if there is a change in
ownership during such month, a statement
indicating his ownership at the close of the
calendar month and such changes in his
ownership as have occurred during such
calendar month. (SRC, Sec. 23)
CIVIL LIABILITY
Grounds for civil liability to arise
1. False Registration Statement (SRC, Sec.
56)
2. Fraud in connection with prospectus,
communications and reports (SRC, Sec. 57)
3. Fraud in connection with security
transactions (SRC, Sec. 58)
4. Manipulation of security prices (SRC ,
Sec. 60)
5. Insider trading (SRC, Sec. 61)
Persons that may be liable in case of false
registration statement
1. The issuer and every person who signed
the registration statement.
2. Every person who was a director of, or
any other person performing similar
functions, or a partner in, the issuer at the
time of the filing of the registration
statement or any part, supplement or
amendment thereof with respect to which
his liability is asserted.
3. Every person who is named in the
registration statement as being or about to
become a director of, or a person
performing similar functions, or a partner
in, the issuer and whose written consent
thereto is filed with the registration
statement.
4. Every auditor or auditing firm named as
having certified any financial statements
used in connection with the registration
statement or prospectus.
5. Every person who, with his written
consent, which shall be filed with the
registration statement, has been named as
having prepared or certified any part of the
registration statement, or as having
prepared or certified any report or
valuation which is used in connection with
the registration statement, with respect to
the statement, report, or valuation, which
purports to have been prepared or certified
by him.
6. Every selling shareholder who
contributed to and certified as to the
accuracy of a portion of the registration
statement, with respect to that portion of
the registration statement which purports
to have been contributed by him.
7. Every underwriter with respect to such
security. (SRC, Sec. 56)
Prescriptive period for filing of action
Two (2) years after the discovery of
the facts constituting the cause of action
and within five (5) years after such cause
of action accrued.

Persons liable for fraud in connection with
prospectus, communications and reports
Any person who offers to sells or
sells:
1. In violation any provisions on
registration of securities; or
2. By the use of any means or instruments
of transportation or communication, by
means of a prospectus or other written or
oral communication. (SRC, Sec. 57.1)
Persons liable for fraud in connection with
security transactions
Any person who engages in any act
or transaction in violation of Sections 19.2,
20 or 26 of SRC.
Persons liable for the manipulation of
security prices
Any person who willfully participates
in any act or transaction in violation of
Section 24 of SRC shall be liable to any
person who shall purchase or sell any
security at a price which was affected by
such act or transaction.
Jurisdiction over civil liabilities
The court which has jurisdiction over
cases involving civil liabilities is the
Regional Trial Court.
Limitation for awarding damages
1. The court can award not exceeding
triple the amount of the transaction plus
actual damage.
2. The court is also authorized to award
attorney’s fees not exceeding 30% of the
award.
Award of exemplary damages
The court may award exemplary
damages in cases of:
1. Bad Faith;
2. Fraud;
3. Malevolence; or
4. Wantonness in the violation of SRC or
the Rules and Regulations promulgated by
the Commission.
RESPONSIBILITY AND
PRIMARY OBJECTCTIONS

Persons liable with regard to insider

trading
Any person in case of legal tender
who:
1. Purchases or sells a security while in
possession of material information not
generally available to the public;
2. Communicates material non-public
information.
NOTE: The liability of the persons
enumerated shall be jointly and severally.