Securities Regulation Code
SRC is also known as the “Blue-Sky Law”, the reason of
An active capital market is indispensable to the growth of
the PH economy. It is a venue where fund mobilization
takes place. There is fund mobilization where securities or
investment, or cash or savings are channeled from the
suppliers thereof, meaning those entities with money to
persons or entities who are in need of money. That’s where
a capital market plays an important role for fund
mobilization.
When we were discussing the Corporation law, there are
2 principal ways in which a corporation obtains cash or
capital to finance their operation:
1. By selling shares of stocks, equity capital
2. By borrowing, incurring or increasing bonded
indebtedness
Thus when corporations want to raise funds, and they
cannot access funds from traditional lenders such as banks
and etc, they have an available option to access funds that
is out there in the public thru trading in the capital market.
So the most common form securities in the PH are shares
of stock or equities sold by companies or bonds.
Due to the SRC, the quasi-judicial powers of the SEC to
hear and decide the so-called intra-corporate controversy
were deleted or removed, and transferred to the RTC. This
was to allow or require the SEC to focus on the capital
market development
which is to protect the investing public from impossible
promises of profit or return on their investment as high as
the blue sky.
SRC is intended to govern public companies only:
 Any corporation:
o With a class of equity listed on an Exchange
or;
o With a class of securities covered by
Registration Statement or;
o With assets in excess of 50M and having 200
or more holders of at least 100 shares of a
class of its equity securities.
 A public company is not limited to a company
whose shares of stock are publicly listed; even
companies like bank are considered a public
company provided that they met the requirements
 Philippine Veterans Bank vs Justina Callagan,
where the PVB falls under the 3rd definition thus it
can be considered as a public company even if it is
a GOCC, as such it cannot escape the
administrative fine as well as the reportorial
requirement on the mere ground that is a
government bank.
 So the SEC does not distinguish between private or
government owned companies, as long as they
qualify within the definition of Public Company
UNLESS the very charter of the public company
provides that it shall not covered by the SRC

Securities – shares, participation or interest (SPI) in a
corporation or in a commercial enterprise or profit-
making venture, evidenced by a certificate, contract or
instrument (CCI), whether written or electronic in
character.
 This is broad enough to include all investment
contracts.
 The standard test to determine if a contract is an
investment contract is the Howey Test:
o There is a transaction, contract or scheme
o Whereby a person makes an investment of
money
o In a common enterprise
o With expectation of profit.
o To be derived solely from the efforts of
others.
 This is the bottom line, “that the contract assures
or promise passive income in favor of the investor
and that passive income come from the effort,
labor or work of another other than that of the
investor:
 So a passive income is a security under the SRC.
 So take note: NO CLASS OF SECURITIES SHALL
BE OFFERED FOR SALE IN THE PH WITHOUT
LICENSE GRANTED BY THE SEC
 Sale of unregistered securities is a crime. This is to
protect the investing public from impossible
promises of profit or return on their investment as
high as the blue sky.
So how can one get a license to sell securities?
Step 1: File a Registration Statement
 Has 2 principal parts:
Prospectus (similar to a brochure)– This
must be delivered by the issuer to
everyone who is offered or buys the
securities. This is detailed summary of
the historical, financial and other
material information regarding the
issuer or the securities.
This is strictly scrutinized by the
SEC because it is the one being
circulated in the public.
Thus inaccuracies in part 1 may
lead to the disapproval of the
registration.
Additional information and exhibits that
the issuer files with the SEC.
 Grounds for Denial of Registration
Insolvency of Issuer
Directors/Officers convicted by
final judgement of securities fraud
and other frauds, whether in the
PH or abroad
Statement is false or omits to state
material facts.
Step 2: Primary License of Security
 When there is no ground to deny the
registration statement, the SEC shall issue PLS.
  The primary license means that the securities
are now registered in the central registry of
securities.
 The securities are officially registered, but can
they already be sold? Not yet.
 There is a need for the SEC to determine
whether or not to issue a secondary license of
security.
Step 3: Secondary License of Security
 This is the license to sell
 The issuance of such paves way for the issuer to
start offering the shares to the public
 The initial disposition of the security shall be
called Primary Market Transaction
 When the license to sell is issued to a
corporation, the corporation may hire a
securities underwriter – one engaged in the
business of underwriting
 Business of underwriting – this is the business
of guaranteeing the sale or disposition of
securities within the PH.
 A securities underwriter is typically an
investment house.
 So let’s say SM hires BDO as its underwriter
agent, what will be the relationship between
them? SM will not directly sell the securities,
instead it is BDO that will run through its
various clients.
 If they make a sale, then they are entitled to
compensation by way of commissions.
 If they fail to make a sale, the consequence is
that under the underwriting agreement it is the
underwriter that must pay for the unsold share.
 So let’s say the contract is for 30 days, BDO must
ensure within 30 days that the securities will be
sold or else he will have to pay for the same.
Step 4: Primary Market Transaction (Public Offering)
 This is akin to a subscription in the RCC.
 So a subscription contract is a Primary Market
Transaction.
 When we speak of Primary Market Transaction,
we mean that the shares or securities are being
sold or offered for sale for the first time.
 After the initial public offering of the registered
securities, meaning they are now in the hands of
the original subscribers, these original
subscribers do not buy securities to hold it for a
long time usually they engage in some sort of
speculative trading to increase their potential
for profit.
 That’s why the original subscribers during the
initial public offering/primary market
transaction need now to liquidate their
purchases but offering the same to any
interested parties.
 Sometimes, these original subscribers don’t
know anyone that interested of the securities,
 that’s why they resort to secondary market
transaction.
Step 5: Secondary Market Transaction
 Secondary market transaction involving
securities we go back to the RCC.
 Remember there are 2 ways for a person to
become SH are the ff:
1. By way of subscription (primary market
transaction)
2. By acquiring the shares of existing stockholder
(secondary market transaction)
 These are not done between parties familiar
with one another.
 Therefore, in order to increase the chance of
selling your current equities, you engage the
services of securities broker.
 Securities Broker – one engaged in the buying or
selling of the securities not for its own account
but for the account for third parties.
The one who will look for customers who
will buy the shares currently held by the
current SH of the corporation.
GR: NO CLASS OF SECURITIES SHALL BE OFFERED
FOR SALE IN THE PH WITHOUT LICENSE GRANTED
BY THE SEC
XPN: Exempt Securities:
1. Any security issued or guaranteed by the Govt of
the Philippines, or by any political subdivision or
agency thereof, or by any person controlled or
supervised by, and acting as instrumentality of said
government
This is exempt because it is
already registered under the
Bureau of Treasury under the
Department of Finance.
2. Any security guaranteed by the govt of any country
which the PH maintains a diplomatic relation or by
any state, province, or political subdivision thereof
on the basis of reciprocity.
It is not the SEC that regulates the
securities of this entities but it is
the Department of Finance and
the DFA.
3. Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper
adjudicatory body
Correlate this to FRIA, in order to
come up with a viable
rehabilitation of a financially
distressed corporation there is a
need to craft a rehabilitation plan.
And one of the tools of
rehabilitation is sale of securities
by the insolvent debtor.
So in this case, it is the court which
order the sale of the securities
meaning the same is exempt from
 registration, since it is judicially
ordered.
4. Any security or its derivatives that sale or transfer
of which, by law, is under the supervision and
regulation of the office of insurance commission,
HLURB, ERB or the BIR.
These are securities, because let’s
take for example HLURB
supervised securities.
These are contract to sell
condominium units – it is actually
a form of return of investment
even if the condominium project
itself has not yet begun
construction. The condo corp is
already trying to sell units, ito
yung tinatawag nating pre-
selling. If you are buying on a pre-
selling terms, you are actually
investing your money on that
enterprise, your return is in the
form of a condominium. So that is
a form of investment contract.
Since the authority to supervise is
already vested, by a special law, to
these agencies, the SEC no longer
exercises power.
5. Any security issued by a bank except its own shares
of stock
6. Other securities as determined by the SEC.
 They are excepted from registration because
they are non-speculative in character.
 Non-speculative in a sense that the profits or
return are somewhat guaranteed.
 So these are the more stable forms of securities.
Another XPN: Exempt Transactions:
1. Any judicial sale, or sale by an executor,
administrator, guardian or receiver or trustee in
insolvency or bankruptcy.
2. Those sold by pledge, mortgage, or any other
similar lien holder, to liquidate a bona fide debt. (a
security pledged in good faith for such debt)
3. Those sold or offered for sale in an isolated
transaction, the owner not being underwriter.
4. Distribution by the corporation of securities to its
SH as dividends
5. The sale of capital stock of a corporation to its own
stockholders exclusively.
6. Bonds or notes secured by mortgage are sold to a
single purchaser at a single sale.
7. Delivery of any security in exchange for any other
security of the same issuer pursuant to a right of
conversion.
8. Broker’s transaction, executed upon customer’s
orders
9. Share of subscription prior to incorporation or in
pursuance of an increase in its ACS.
10. The exchange of securities by the issuer with the
existing security holders exclusively.
11. The sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during any
twelve-month period.
12. The sale of securities to any number of the
following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) 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;
(v) Investment company or;
(vi) Such other person as the
Commission may rule by
determine as qualified buyers.
(vii)
 These transactions need not be registered with
the SEC because of the limited character of the
transaction or where a buyer is a trusted entity.
So public interest does not need
registration
 Most of these are limited in character, an
example is stock dividend declaration.
Again, stocks are securities. But when the
stock dividends are distributed the
public was not involved because
dividends accrue only to SH.
That is why there is no need for
secondary registration of these
secondary transaction
 Another example is the pre-incorporation
subscription
These are contracts to acquire shares of
stocks of a corporation that has not yet
been formed.
But because of the limited number of the
incorporators, there is no public interest
that will be jeopardized by not requiring
the registration.
 Another example is the pre-emptive right
offering.
Remember when new shares are created
following an increase in the capital stock
of the corporation by way of an amended
articles, then the new shares created
must be offered to the existing SH.
Again, the public is not involved in the
pre-emptive right offering.
When we talk about exempt security, it is the security itself
that need not be registered and therefore need not be
covered by a license to sell issued by the SEC.
In the case of exempt transaction, these are transaction
involving registered securities except that the transaction
pertaining thereto need not be reported or registered to
the SEC
So that is how to understand the primary and secondary
market in relation to the capital market.
Protection of Investors
The SRC seeks to protect innocent investor from
unscrupulous party that solicit their money or property.
Therefor the SRC contains provisions that are intended
precisely to protect the interest of the investing public.
Full Disclosure Policy
 To guide investors when making investment
decision, armed with necessary information
 The law does not guarantee that when you
make an investment you will earn profit, that
would be impossible for the state to guarantee.
 Instead, what the law guarantees is that if you
need information in order to make wise
decision, that information will be made
available to you under the full disclosure policy.
 Under this, investors will be guided in making
investment decisions by making available to
them information as they need therefore
1. Tender Offers
 A public offer (so an example is an offer to allthe
SH) to purchase a specified number of shares
from shareholders usually at a premium in an
attempt to gain control of the issuing company.
 So in tender offer, there is usually an outsider
(persons or group of persons) to the company,
who wants to become a SH. Not just an ordinary
SH, but be a controlling SH.
 How? By offering the buy the shares of the SH
of that company and promising a premium.
o Premium - meaning a price higher than
the prevailing price.
o Note that in some instances, the
premium is payable only if the offeror is
able to obtain the required number of
shares.
 These are required to be published in a
newspaper of general circulation
 There are 2 types of TO, voluntary and
mandatory.
Voluntary TO - may be made anytime.
Mandatory TO - the TO must be addressed to all SH of
record and must specify the price by which the offer must
be accepted or received
 Under the SRC, there are 2 instances in which the
TO will be mandatory.
1. When the person or group of persons
acquires at least (35%) of the outstanding
equities (we refer to the voting shares of
 stocks) of a public company by way of a
single transaction or in a series of
transaction within the period of 12
months
o 35% is enough for a stranger or 3rd
person to initially enter the
corporation, gain power, and
influence the BOD.
o Imagine holding 35% of the
outstanding equities of a public
corporation, that would essentially
guarantee you 2 seats in the BOD.
o This case involves a complete
stranger.
o This is known as a “creeping
transaction” or “creeping takeover”
o So let’s say I want to take over Pogi
Inc, however, I am not very friendly
with the controlling SH. Since the
controlling SH refuses to sell to me, I
will now post a tender offer, offer to
buy the shares of all others.
o If the shares of all others reach 35% of
the total outstanding equities, then I
should offer to buy the share of ALL
SH of that target company.
2. When a person or group of persons
acquires more than 50% of the
outstanding equities of a public
company.
o Here, the one making an offer is
currently a SH by offering to buy the
shares of the other SH, and upon
doing so, his interest will breach the
51% threshold.
o Let’s say X is already a SH of Pogi Inc,
but he owns only 40%, he wants to
increase his shareholdings in the
company.
o If in case of the offer, his shares will
now reach the 50% mark, he is now
required to make a tender offer to all
the other SH.
3. When any person or group of person
acquires 15% of the outstanding equities
of a public company in one or more
transaction within a period of 12 months.
o The one making the TO shall only file
a declaration to that effect with the
SEC.
MTO may prove to be prohibitive for those who wants to
take over, seize or raid a company.
 For example, I want to acquire 35% and therefore
enter and gain control of a public corporation.
 I can simply negotiate with one or two existing SH
of the corporation, who is willing to sell to me a
combined share of 35% of the outstanding equities
of the company.
  So let’s say the prevailing market value is 10 pesos
per share, and I agreed to pay them 15 pesos per
share.
 So because of the 35% mark, I am now required to
offer the SAME TERM AND THE SAME PRICE to
the owners of the remaining 65% of the outstanding
equities of the company.
 Usually this is to give the minority SH an
opportunity to opt out of the corporation under the
same terms and conditions as the controlling SH.
CEMCO Holdings vs. National Life
The MTO rule covers not only direct acquisition but also
indirect acquisition or any type of acquisition.
ANTECEDENT FACTS:
Union Cement Corporation (UCC) has 2 principal
stockholders: UCHC (60.51%) and Cemco (17.03%).
Majority of UCHC’s stocks are owned by BCI (21.31%) and
ACC (29.69%). Cemco owned 9% of UCHC stocks.
BCI informed PSEi that it and its subsidiary ACC had
passed resolutions to sell to Cemco BCI’s stocks in UCHC
equivalent to 21.31% and ACC’s stocks in UCHC
equivalent to 29.69%.
Cemco’s beneficial ownership in UCC increased by 36%,
amounting to 53% of all shares of UCC.
PSEi inquired to SEC as to whether the Tender Offer Rule
is applicable to Cemco’s purchase of the majority shares of
UCC.
Respondent National Life Insurance Company (NLIC), a
minority shareholder of UCC, sent a letter to Cemco
demanding the latter to comply with the rule of
mandatory tender offer. Cemco refused.
 NLIC filed a complaint with SEC asking to reverse
the Resolution declaring the finality of the Cemco’s
purchase
 SEC ruled in favor of NLIC, and Court of Appeals
(CA) similarly affirmed this decision
Cemco contends that R.A. No. 8799, Section 19 does not
vest SEC with jurisdiction to adjudicate and determine
rights and obligation of the parties since, under the same
statute, SEC is not authorized to issue orders granting
affirmative reliefs.
ISSUE(S)
1. Does SEC have jurisdiction to adjudicate the dispute
between the parties involved, or to render judgment
requiring Cemco to make a tender offer for the UCC shares
in question?
2. Is Cemco’s purchase of UCC shares subject to the tender
offer requirement, and does the rule on mandatory tender
offer also apply to shares that were indirectly acquired?
OPINION(S) OF THE COURT and RULING

R.A. No. 8799 grants authority to SEC to regulate,
investigate, or supervise the activities of persons to ensure
compliance with the Securities Regulation Code. The
purpose thereof is to protect investors and to minimize
fraudulent and manipulative devises. The power
conferred upon SEC to promulgate rules and regulations
is a legislative recognition and the impossibility of
foreseeing all the possible contingencies that cannot be
addressed in advance.
The mandatory tender offer is still applicable even if the
acquisition is less than the 35% threshold, when the
purchase would result in ownership of over 51% of the
total outstanding equity securities of the company.
By acquiring the controlling stock in UCHC, the indirect
interest of Cemco towards UCC also increased breaching
the 50% mark.
2. Price Manipulation
 Another protection to investors is the
prohibition on price manipulation
 There is price manipulation when the prices of
the securities in the market are artificially
controlled.
 So there is an attempt to force security holders
to sell at prices either above or below the market
driven price.
 The manipulator hopes to profit by creating
fictitious prices at the expense of the general
trading public.
 So who benefits from this? Remember in the
stock exchange that a trading of securities from
one person to another, the electronic board of
PSE immediately reflects the rise or fall of the
prices of stock of corporations listed under PSE.
So this provides transparency of the price
change of these stocks.
o It is the current owners who are
benefited from the artificial increase of
price, since now they can sell their shares
for an increased price
o Who benefits from the fall of the price?
Those who intend to acquire more shares
with the intent to sell the same later at a
higher price.
 Manipulative practices:
1. Engaging in a series of transaction in
securities that are reported publicly to
give the impression of activity or price
movement in a security. (painting the
tape)
This is what the Calata Case
utilized.
2. Buying and selling securities at the close
of the market in an effort to alter the
closing price of the security (marking the
close)
 What’s the significance of this?
The price at the closing is the price
at the opening the following day.
So if the closing price today is a
manipulated price so it
perpetrates the fraud because it is
carried over to the following day.
3. Engaging in the transactions where both
the buy and sell orders are entered at the
same time with the same price and
quantity by different but colluding
parties. (improper matched order)
4. Engaging in buying activity at
increasingly higher prices and then
selling securities in the market at the
higher prices or vice versa.
5. Engaging in transactions in which there
is no genuine change in the actual
ownership of a security taking into
consideration internal control systems
adopted by the firms to prevent
manipulative practices. (wash sale)
6. 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 (squeezing
the float)
7. Disseminating false or misleading
market information through media,
including the internet, or any other
means to move the price of a security in
a direction favorable to a position held or
a transaction;
8. Other types of prohibited conduct
and/or manipulative practice which
include, among others, the creation of
temporary funds for the purpose of
engaging in other manipulative
practices.
The purpose here is to avert any potential damage to the
investing public by immediately stepping in and stop the
price manipulation. That is why both the PSe and the PDS
(Phil. Dealing System) as well as the SEC go hand in hand
in seriously preventing the price manipulation.
3. Prohibition against Insider Trading
 Another protection provided by the SRC
 These occurs when an insider sell or buys a
security of the issuer, while in possession of a
material information with respect to the issuer
or the security that is not generally available to
the public. (material non-public information)
 Correlate this to the “special facts doctrine” or
the “inside information doctrine” that can hold
a director or officer liable civilly, criminally or
administratively
 Who is an Insider? Is one who is either
presumed by law or must be proven under the
law to possess a material non-public
information at the time he or she traded his or
her securities
o This insider have such material non-
public information by virtue of their
present or past relationship with the
security issuer or with the persons
responsible within the security issuer
o Therefore the insider includes the 1)
issuer, 2) director or officer, or any
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 of the security that is not
generally available to the public, 4) a
govt employee, or a director, 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. (Classical
Insider); or
o A person who learns such information by
a communication from any of the
foregoing insiders (Constructive Insider)
In case of constructive insider
there is no presumption against
them that they possess material
non-public information when
they traded.
 So let’s say I’m a director or a company and then
pursuant to committee report that was given to
me confidentially and which will be discussed
in the forthcoming board meeting, I learned that
the corporation is suffering from insolvency.
o No with that kind of information,
imagine how the public will react if they
get the report, if the shares are sold in the
stock exchange, people will stop buying
the shares, current SH will start selling
off their shares.
o So using that inside information, I, the
director will start selling the shares of
stock while price is still high. May aim is
to dispose all of those shares or
substantial portions of the company
BEFORE the information regarding the
financial loss gets to the public.
o I am a classical insider engaged in insider
trading
 If on that night, I told my close friend about the
losses and I even requested such friend not to
share such information.
o The friend is also an existing SH of the
company
o If my friend starts selling his or her share,
armed with the material non-public
information then my friend has now
become a constructive insider.
o Both of us might be prosecuted for
insider trading.
 The essence of insider trading rests on the
possession of non-public information of facts of
special significance.
o Material non-public information – it is
material because it will likely affect the
price of the securities in the market once
made public.
o Thus all kinds of information (eg.
Election of directors, appointment of key
officers, new patent issued to the corp by
the IPOPhil), these are all material and
significant information.
 Defenses against Insider Trading:
1. The insider proves that the information
was not gained from such relationship;
or
2. If the other party selling to or buying
from the insider (or his agent) is
identified, the insider proves:
a. That he disclosed the information
to the other party
b. That he had reason to believe that
the other party otherwise is also in
possession of the information