MODULE 3: SECURITIES REGULATION CODE

Securities Regulation Code

• The SRC is also termed as a “Blue Sky Law”, enacted to protect the public from unscrupulous
promoters, who stake business or venture claims which have no real basis, and sell shares or
interests therein to investors, who are then left holding certificates representing nothing more than
a claim to a square of the blue sky.
• State Policy: The State shall establish socially conscious, free market that regulates itself,
encourage the widest participation of ownership in enterprises, enhance the democratization of
wealth, promote the development of the capital market, protect investors, ensure full and fair
disclosure about securities, minimize if not totally eliminate insider trading and other fraudulent or
manipulative devices and practices which create distortions in the free market.
• Purpose: The Securities Regulations Code or RA No. 8799 aims to protect the investing public
primarily through a system of disclosure and provide punishment for fraudulent practices.

Protection of the public

1. Requiring full disclosure of information to the public regarding the securities that are being offered
and the issuers, including the filing and approval of the registration statement and the approval of
the prospectus;
2. The requirement of regularly submitting material information to the SEC;
3. Close monitoring of the securities and other circumstances that may affect the same as well as the
persons involved including brokers, issuers, the exchange itself, etc. in order to ensure compliance
with pertinent laws and regulations;
4. Prohibiting and penalizing different fraudulent practices and transactions; and
5. Providing the SEC the powers and functions.

SEC Powers and Functions

1. Have jurisdiction and supervision over all corporations, partnerships or associations who are
grantees of primary franchises and/or a license or a permit issued by the Government
2. Formulate policies and recommendations on issues concerning the securities market, advise
Congress and other government agencies on all aspects of the securities market and propose
legislation and amendment thereto
3. Approve, reject, suspend, revoke or require amendments to registration statements and
registration and licensing applications
4. Regulate, investigate or supervise the activities of persons to ensure compliance
5. Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other
SROs
6. Impose sanctions for the violation of laws and rules, regulations and orders and issued pursuant
thereto
7. Prepare, approve, amend or repeal rules, regulations and orders and issue opinions and provide
guidance on and supervise compliance with such rules, regulations and orders
8. Enlist the aid and support of and/or deputize any and all enforcement agencies of the Government,
civil or military as well as any private institution, corporation, firm, association or person in the
implementation of its powers and functions under the SRC
9. Issue cease and desist orders to prevent fraud or injury to the investing public
10. Punish for the contempt of the Commission, both direct and indirect, in accordance with the
pertinent provisions of and penalties prescribed by the Rules of Court
11. Compel the officers of any registered corporation or association to call meetings of stockholders
or members thereof under its supervision
12. Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the
Commission and in appropriate cases, order the examination, search and seizure of all documents,
papers, files and records, tax returns and books of accounts of any entity or person under
 investigation as may be necessary for the proper disposition of the cases before it, subject to the
provisions of existing laws
13. Suspend or revoke after proper notice and hearing the franchise of certificate of registration of
corporations, partnerships or associations, upon any of the grounds provided by law
14. Exercise such other powers as may be provided by law as well as those which may be implied from,
or which are necessary or incidental to the carrying out of, the express powers granted the
Commission to achieve the objectives and purposes of these laws

Securities
• are shares, participation or interests in a corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract, instruments, whether written or electronic in
character.
• The main feature of a security is that a person purchases or acquires the same in the expectation
of obtaining passive income or asset appreciation, that is income or gain obtained through the
effort of another person. This feature makes them attractive and desirable and necessitates the
protection of the investing public.
• They include:
1. Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed
securities;
2. Investment contracts, certificates of interest or participation in a profit sharing agreement,
certifies of deposit for a future subscription;
3. Fractional undivided interests in oil, gas or other mineral rights;
4. Derivatives like option and warrants;
5. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates
or similar instruments
6. Proprietary or nonproprietary membership certificates in corporations; and
7. Other instruments as may in the future be determined by the Commission.

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.
• Requisites:
o An investment of money;
o In a common enterprise;
o With expectation of profits;
o Primarily from the efforts of others (this modifies the Howey Test which requires profits to
be derived “solely” from the efforts of others)

Registration of Securities
• The Securities Regulations Code (SRC) provides that securities shall not be sold or offered for sale
or distribution within the Philippines, without a registration statement duly filed with and approved
by the SEC (Commission). Prior to such sale, information on the securities, in such form and with
such substance as the Commission may prescribe, shall be made available to each prospective
purchaser.
• The Commission may audit the financial statements, assets and other information of a firm applying
for registration of its securities whenever it deems the same necessary to ensure full disclosure or
to protect the interest of the investors and the public in general.

Procedure for Registration of Securities

1. Filing of SWORN REGISTRATION STATEMENT containing the information as the SEC may by rule
require.
 a. Signatories to registration statement: Executive officer, principal operating officer, principal
financial officer, comptroller, principal accounting officer, corporate secretary.
b. Written consent of the expert named as having certified any part of the registration statement,
whenever necessary.
c. Where the registration statement includes shares to be sold by selling shareholders, a written
certification by such selling shareholders as to the accuracy of any part of the registration
statement contributed to by such selling shareholders shall also be filed.
2. PAYMENT of the filing fees which shall not exceed 1/10 of 1% of the aggregate price at which such
securities are proposed to be offered.
3. PUBLICATION of notice of the filing of the registration statement in two newspapers of general
circulation once for two consecutive weeks.
4. Within 45 days after the date of filing, or by such later date to which the issuer has consented, the
SEC shall give an ORDER declaring the registration statement effective or rejecting it.
5. PROSPECTUS under oath that all requirements satisfied and all statements in registration statement
and in such prospectus are correct.

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 and 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 commission may require compliance with the form and content
of disclosures the commission may prescribe
3. Certificate 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 the Insurance Commission, HLURB or BIR
5. Any security issued by a bank except its own shares of stock

Exempt Transactions
1. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in
insolvency or bankruptcy
2. By or for the account of a pledge holder, or mortgagee or any other similar lien holder selling or
offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding
provisions of the SRC to liquidate a bona fide debt, a security pledged in good faith as security for
such debt
3. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the
owner thereof, or by his representative for the owner’s account, such sale or offer for sale,
subscription or delivery not being made in the course of repeated and successive transactions of
a like character by such owner, or on his account by such representative not being the underwriter
of such security
4. 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
5. 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
6. The issuance of bonds or notes secured by 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. 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
8. Broker’s transactions, executed upon customer’s orders, on any registered exchanges or other
trading market
9. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof 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. The exchange of securities by the issuer with its existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such
exchange
11. The sale of securities by an issuer to fewer than 20 persons in the Philippines during any 12-month
period
12. The sale of securities to any number of the following qualified buyers:
a. Bank
b. Registered investment house
c. Insurance company
d. Pension fund or retirement plan maintained by the Government of the Philippines or any
political subdivision thereof or managed by a bank or other persons authorized by the BSP to
engage in trust functions
e. Investment company
f. Such other person as the Commission may by rule determine as qualified buyers

Reportorial Requirements
1. Annual report composed of a Balance Sheet, Profit and Loss Statement, and a Statement of Cash
Flows certified by a CPA and a management discussion and analysis of results of operation
2. Other periodical reports for interim fiscal periods and current reports on significant developments
of the issuer as the SEC may prescribe as necessary to keep current information on the operation
of the business and financial condition of the issuer.

These reportorial requirements shall apply to an issuer:

1. Which has sold a class of its securities pursuant to a registration
2. With a class of securities listed for trading in an Exchange
3. With assets of at least Fifty million pesos (50,000,000.00) or such other amount as the SEC shall
prescribe, and having two hundred (200) or more holders each holding at least one hundred (100)
share of a class of its equity securities: Provided, however, That the obligation of such issuer to file
report shall be terminate ninety (90) days after notification to the SEC by the issuer that the number
of its holders holding at least one hundred (100) share reduced to less than one hundred (100)

Note: The issuer shall likewise furnish to each holder of such equity security an annual report in such
form and containing such information as the SEC shall prescribe.

Insider Trading
• Insider trading is committed whenever an insider, in possession of a material non-public
information transacts on the securities.

Material Nonpublic Information: information that will affect the price of the security or would influence a
person in deciding whether to buy, sell, or hold a security which is not available to the public.
Insider
1. The issuer.
2. A director or officer of the issuer or a person controlling the issuer.
3. A person whose relationship or former relationship to the issuer gives or gave him access to
material non-public information.
4. A government employee, or director, or officer of an exchange, clearing agency, and/or self-
regulatory organization who has access to material non-public information.
5. A person who learns such information by a communication from any of the foregoing

Exceptions: a person in possession of material nonpublic information can buy or sell securities:
1. When he can prove that the information was not gained from an insider;
2. If the other party is identified and that he:
a. Disclosed the information; or
b. Had reason to believe that the other party is also in possession of the information.

Tender Offer
• A tender offer is an offer by a person or group of persons to the stockholders of a corporation to
tender their shares for purchase.
• Purpose: The rule on mandatory tender offer seeks to protect minority shareholders and provide
them with a fair price for their share whenever a person or group of persons intends to buy a sizable
number of shares in the company.

Liability for disclosure:

• 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, 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.
o This is regardless of whether the one to whom the communication was given actually traded
on the securities.

Manipulation of Security Prices

1. 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: by effecting any transaction in such security which involves no change in the
beneficial ownership thereof
b. Matched orders: 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 (but colluding) parties
c. Market rigging or jiggling: by performing similar act where there is no change in beneficial
ownership

2. To effect, alone or with others, a series of transactions in securities that:

a. Raises their price to induce the purchase 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
b. 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
c. Creates active trading to induce such a purchase or sale through manipulative devices such as:
i. Marking the close: placing of purchase or sale order, at or near the close of the trading
period
 ii. Painting the tape: akin to marking the close but the activity us made during the normal
trading hours
iii. Squeezing the float: the part or portion of the issue/security which is outstanding but
intentionally held by dealers or other persons with a view of reselling them later for profit
iv. Hype and dump: act employed by a person or group of persons of purchasing the
outstanding capital stock of a dormant public shell company for a nominal amount and
merge it with their privately held company
v. Boiler room operations: involves an intensive selling campaign through numerous
salesmen by telephone or through direct mail offerings for securities of either a certain
type or from a specific issuer
vi. Improper matched orders: engaging in 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
vii. Scalping: where a person purchases securities for his own account before
recommending that security, and then sells the share at a profit upon the rise in the
market price following the recommendation
viii. Daisy chain: a pattern of fictitious trading activity by a group of persons who lures
innocent people into the scheme
ix. Flipping: operated where one office buys a particular stock for customers, while another
office simultaneously recommends that its customers sell the stock, with the stock being
shifted from one office to another, and the firm makes a profit, and the broker earn their
commissions
x. And such other similar devices
3. 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 purchase or sale of such security.

Disclosure Rule
• requires that material information should be disclosed to the Exchange within the prescribed
period from receipt of such information to protect investors’ interests

Tender Offer
• A tender offer is an offer by a person or group of persons to the stockholders of a corporation to
tender their shares for purchase.
• Purpose: The rule on mandatory tender offer seeks to protect minority shareholders and provide
them with a fair price for their share whenever a person or group of persons intends to buy a sizable
number of shares in the company.

Mandatory Tender Offer: applies to any person who intends to acquire at least 35% over a period of 12
months (previously 30, increased by the SEC pursuant to Section 72.1 of the SRC) of any class of any equity
security of a:
1. Listed corporations; or
2. Corporations with:
a. Assets of at least P50M and
b. Having at least 200 shareholders who each have at least 100 shares
Note:
➔ The rule shall likewise apply even if the acquisition is less than 35% but will result in ownership of over
51% of the total outstanding equity securities of the public company.
➔ The offeror would be required to accept any and all securities thus tendered.
➔ Note that the percentage requirements likewise applies even in indirect acquisitions.
Transactions EXEMPT from the Mandatory Tender Offer Requirement
1. Any purchase of shares from the unissued capital stock provided that the acquisition will not result
to a 50% or more ownership of shares by the purchaser;
2. Any purchase of shares from an increase in authorized capital stock.
3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or
security arrangement where the acquisition is made by the debtor or creditor.
4. Purchases in connection with privatization undertaken by the government of the Philippines.
5. Purchases in connection with corporate rehabilitation under court supervision.
6. Purchases through an open market at the prevailing market price.
7. Merger or Consolidation.

Process in tender offer

1. The offeror will 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 SEC Form 19-1 with the SEC including all exhibits thereto and pay the prescribed filing fees
b. Hand deliver a copy of such form including all exhibits to the target company at its principal
executive office and to each Exchange where such class of the target company’s securities are
listed for trading.
Note: Report the results of the tender offer by filing with the Commission, not later than ten (10) calendar
days after the termination of the tender offer, copies of the final amendments to the form.

Penalty
• The violator is subject to criminal prosecution, with an imposable penalty of imprisonment of not
less than 7 years nor more than 21 years. If the offender is a corporation, partnership or association
or other juridical entity, the penalty may be imposed on the officer responsible for the violation.

Civil Liabilities
• brought before RTC (exclusive); damages not exceeding triple the amount of the transaction plus
actual and exemplary damages (if necessary) and attorney’s fees not exceeding 30% of the award
1. On account of false registration statement
2. Arising in connection with prospectus, communications and reports
3. For fraud in connection with securities transactions
4. For manipulation of security prices
5. With respect to commodity futures contracts and preneed plans
6. On account of insider trading
Note: No action shall be maintained unless brought within 2 years after discovery and within 5 years after
such cause of action accrued.

Corporate Governance
• the system of stewardship and control to guide organizations in fulfilling their long-term economic,
moral, legal, and social obligations towards their stakeholders; a system of direction, feedback,
and control using regulations, performance standards and ethical guidelines to hold the board and
senior management accountable for ensuring ethical behavior—reconciling long-term customer
satisfaction with shareholder value—to the benefit of all stakeholders and society; to maximize the
organization’s long-term success, creating sustainable value for its shareholders, stakeholders, and
the nation
Filing of General Information Sheet (GIS): All corporations shall file their GIS within 30 calendar days
from
1. Stock corporations: date of actual annual stockholders’ meeting
2. Non-stock corporations: date of actual annual members’ meeting
3. Foreign corporations: anniversary date of the issuance of the SEC License

Filing of Annual Audited Financial Statements

a. All corporations, including branch offices, representative offices, regional headquarters, and
regional operating headquarters of foreign corporations whose fiscal year ends on December 31:
depending on the last numerical digit of their SEC registration or license number in accordance
with the schedule set by the SEC (Note: All corporations may file their AFS regardless of the last
numerical digit or license number on or before the first day stated in the coding schedule.)
b. Those whose fiscal year ends on a date other than December 31: within 120 calendar days from
end of their fiscal year
c. Broker dealer whose fiscal year ends on December 31: depending on the last numerical digit of
their SEC registration or license number in accordance with the schedule set by the SEC
d. Broker dealer whose fiscal year ends on date other than December 31: within 110 calendar days
after the close of such fiscal year
e. Those whose securities are listed on the Philippine Stock Exchange (PSE) and those whose
securities but not listed in PSE and Public Companies covered under SRC: within 105 calendar days
after the end of the fiscal year
f. Those whose AFS are being audited by the COA provided that the following documents are
attached to their AFS:
1) An affidavit signed by the President and Treasurer (or CFO) attesting to the fact that the
company timely provided COA with the financial statements and supporting documents and
that the audit of COA has just been concluded; and
2) A letter from COA confirming the above information.
g. Late filings or filing after respective due dates shall be accepted but subject to the prescribed
penalties which shall computed from the date of the last day of filing schedule.
h. The AFS, other than the consolidated financial statements, shall have the stamped “received by the
Bureau of Internal Revenue (BIR) or its authorized banks”, unless the BIR allows an alternative proof
of submission for its authorized banks.