SECURITIES REGULATION CODE

 Called Blue Sky Law, which offers two-fold protection:

1. to protect the public against speculative schemes which have no more basis than many
feet of the blue sky, and against the sale of stock in “fly-by-night” concerns.
2. To protect legitimate businesses from crooked promoters.

 SEC POWERS AND JURISDICTION.

 Merely regulatory. Revocation of registration of securities and permit to sell them to
the public
 But SEC can assume jurisdiction to determine if there were administrative violations
despite the complaint having raised intra-corporate issues
 SEC may investigate activities of corporations to ensure compliance with the law

 WITHOUT JURISDICTION over cases enumerated under Sec5 of PD 902-A since the
same is transferred to the RTC as Commercial Court. These are:
a. Cases involving devices or schemes amounting to fraud. Mere use of word “fraud of
creditors’ is not sufficient; fraud means diverting or siphoning corporate property
for personal use.

b. Intra-corporate controversies. Includes disputes:

a. between the corporation, partnership or association + public [corp v public]
b. between corporation, partnership or association + state, regarding its
franchise, permit or license to operate [corp v state]
c. between corporation partnership or association + its SH, partners, members
or officers [corp v SH/partners/officers]
d. among SH, partners, associates, themselves [royal rumble]

 TEST IN DETERMINING INTRA-CORPORATE CONTROVERSY (MUST CONCUR)

1. RELATIONSHIP TEST. Those letter a to d immediately above.
2. NATURE OF CONTROVERSY TEST. Enforcement of the rights under RCCP,
internal and intra-corporate regulatory rules of the corporation.

c. Election, appointment, removal of corporate officers

Requirements to be considered as corporate officer:
1. Position is created under the corporation’s charter (AoI) or by-laws; and
2. The election of the officer is by the directors or stockholders.

“Although a blanket authority provides for the Board's appointment of such other
officers as it may deem necessary and proper, the respondents failed to sufficiently
establish that the position of AVP for Sales was created by virtue of an act of
Broadcom's board, and... that Cosare was specifically elected or appointed to such
position by the directors. Marc II Marketing, Inc. v. Joson[38] that an enabling clause
 in a... corporation's by-laws empowering its board of directors to create additional
officers, even with the subsequent passage of a board resolution to that effect,
cannot make such position a corporate office. The board of directors has no power to
create other corporate offices... without first amending the corporate by-laws so as to
include therein the newly created corporate office.”

- Cosare vs Broadcom asia

d. Suspension of payment and corporate rehabilitation

- Under FRIA.

 Applies only to any “public company”, which is defined as:

o With a class of equity securities (shares or bonds for example), listed on an Exchange; or
o With a class of securities covered by a Registration Statement, or
o With assets of more than P50M, having at least 200 SH, where those SH having owned
100 shares each. (more than P50M:200:100)
 This is without regard on the nature of whether the company is government-owned or
privately owned, except when the special charter explicitly provides otherwise.

Securities
 Shares, participation, or interest (SPI) in a corporation, In a commercial enterprise, or profit-
making venture (CCP); evidenced by a certificate, contract, instrument (CCI), whether
written or electronic in form.
 Treasury bills issued by the government ARE securities under the definition above, but
they are exempted from the requirements herein.
 The definition does not distinguish as to who the buyer of securities is.

- WHAT REALLY IS THE PURPOSE OR REQUIREMENTS UNDER SRC?

 REGISTRATION BEFORE SALE

1. of Securities. After the filing of registration statement, issuer cannot
sell while waiting, or pre-offering period. An issuer can only sell once
the securities are duly registered.

 REPORTORIAL REQUIREMENT
1. Covered issuer: Public company, which is characterized as one who
has sold securities pursuant to registration; has listed in an exchange
or with assets of at least P50M and has 200 or more SH each holding
at least 100 shares
 TENDER OFFER RULE (FAVORITE BAR MATTER)

- Tender offer. Is a publicly announced intention of a person to acquire

equity securities of a target public company. Bawal isa isahin ang mga SH
para alukin na ibenta yung kanila if mabbreach yung threshold. (see also
the tender offer rule below at the topic “protection under SRC”

TRESHOLD:

- Unless the acquisition of equity securities is intended to circumvent or

defeat the objectives of the tender offer rules, the mandatory tender
offer requirement shall NOT apply to the following:
i. Any purchase of securities from the unissued capital stock
(kasi usually ang tender offer rule ay nirerequire para sa mga
entity na gusto iconquer yung target corporation, e lahat ng
shares ay issued and owned na by SH); provided, the
acquisition will not result to a 50% or more ownership of
securities by a purchaser or such percentage that is sufficient
to gain control of the board;
 ii. Any purchase of securities from an increase in authorized
capital stock;
iii. Purchase in connection with foreclosure proceedings involving
a duly constituted pledge or security arrangement where the
acquisition is made by the debtor or creditor;
iv. Purchases in connection with a privatization undertaken by
the government of the PH
v. Purchases in connection with corporate rehabilitation under
court supervision
vi. Purchases in the open market at the prevailing market price
vii. Merger or consolidation

 CURTAIL MANIPULATIVE PRACTICES (2ND FAVORITE BAR MATTER)

- Short sale. sale of stocks which the seller does not own yet
- Wash sale or simulated sale. Sale with no change in beneficial
ownership, done merely to effect a change in the price of security
- Boiler room operation
- Poop and scoop
- Hype and dump
- Marking the close
- INSIDER TRADING. The buying or selling of securities by an insider
while in possession of material information with respect to the
issuer or the security that is not generally available to the public.
(material non-public information)
o DEFENSES of a person charged of insider trading:
1. The information was gained from other sources, and
not from the relationship contemplated in insider
trading.
2. If the other party selling to or buying from the insider
(or his agent) is identified, the alleged insider may
prove:
 That he disclosed the information to the other
party; or
 That he had reason to believe that the other
party otherwise is also in possession of such
information
 - An information is material nonpublic if: (element of MATERIALITY &
PUBLICITY)
o IT 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
o Would be considered by a reasonable person as important
under the circumstances in determining his course of action
whether to buy, sell or hold a security.

 CLASSIFICATION or CLASSES OF SECURITIES. [EDDIT]

1. Equity – shares of stocks, profit participation certificate, certificate of membership,
whether proprietary (with dividends) or nonproprietary (use of premises only, like
resort membership)
2. Debt – bonds, debenture (no collateral, except for name and standing of corporation)
3. Derivatives – options, warrants
4. Investment – investment contract (Howey test)
5. Trust – Trust certificate, Voting trust certificate
 Howey Test (elements) – used to determine whether or not there is an investment contract;
an investment contract is presumed to exist whenever a person seeks to use the money or
property of others on the promise of profits. An investment contract is a security under SRC.

1. There is a transaction, contract or scheme

2. Involving the investment of money
3. In an enterprise
4. With expectation of profits
5. To be derived solely from the efforts of others.

 Why is it important to determine whether one is an investment contract or not using the
Howey Test? An investment contract is a security, and thus it must be registered under SRC.
In short, you expect profits entirely through the efforts of others. Kadalasan dito ay mga
pyramiding scheme

 No class of securities shall be sold or offered for sale in PH w/o license granted by SEC;
violation thereof is a crime. Thus, how to obtain a license to sell securities?

1ST STEP. REGISTRATION STATEMENT (FILED with SEC)

 This has two principal parts: the prospectus (this is the one circulated to the investing
public), and the additional information and exhibits that the company does have to deliver
to investors but must file with the SEC.

Grounds for denial of Registration (by SEC)

1. Insolvency of issuer
2. Directors,Officers are convicted of final judgement of securities fraud and other
frauds
3. Falsity or omissions of material fact in the registration statement.

Procedure:

1. Registration statement –
2. Primary license of security (securities are now registered) – no authority yet
to sell
3. Secondary license of security (now the public corporation is allowed to sell
these registered securities) – may be done by an appointed securities
underwriter (investment house). Parang pinaka-agent ni company for the selling
of securities to the public, in behalf of the corporation. Si underwriter ay
tagabenta. If mabenta ung securities, commission earned by underwriter. If
hindi mabenta ung securities (and is usually provided under underwriting
 agreement) it is the underwriter who has to pay for the securities, among other
stipulations.

“underwriting” – guaranty of sale of shares/securities. Example,

company A underwrites the shares of Company B. Therefore, company A
undertakes, for commission, that the securities of Company B will be sold in
behalf of the latter.
4. primary market transaction (public offering or tender of these registered
securities) – involves the subscription contract of the unissued capital shares.
5. Secondary market transaction – acquisition or purchase (under corpcode);
also includes transaction with a securities broker – who is engaged in the buying
and selling of shares on behalf of another.

EXEMPT SECURITIES
- If the security is exempt, all transactions and dealings involving them
are likewise exempt.
- WHY ARE THEY EXEMPT? Because they are generally backed by the
government and carries a lesser risk than securities offered by public
companies.

Exempt securities (not speculative in nature)

1. Securities issued by GRP

2. Securities issued by foreign government
3. Certs issued by a receiver or trustee in bankruptcy duly approved by proper adjudicatory body.
Usually as part of the rehabilitation or liquidation plan under FRIA, the securities of a
corporation are ordered by a proper adjudicatory body or a court are to be sold for the benefit
of all stakeholders. Since this is upon order of the court, it need not be registered under SEC.
4. Securities under the powers of HLURB (contracts to sell condo), Insurance Corporation (pre-
need plans, insurance), BIR (tax-credit certificates)
5. Shares issued by a bank, except its own shares of stock. (example of bank security: savings
account)
6. Other securities determined by SEC.

EXEMPT TRANSACTIONS
-not required to be registered because of either:
a. limited character of the transaction
- stock dividend declaration are limited to existing SH;
 - pre-incorporation subscription which are only available to limited number of
incorporators;
- pre-emptive rights offering which are only available to existing shareholders
- Judicial and foreclosure sale
- Isolated transactions or sale by owner
- Sale of capital stock by corporation to its stockholders (but issuance of
previously authorized but unissued shares NOT exempt – to be approved by directors
kaya need iprotect si SH)
- Pre-incorporation subscription or subscription pursuant to capital increase
(kasi dumaan na to sa SEC; normally pag dumaan na sa government regulatory agency,
exempt na sya)

b. where the buyer is a trusted entity.

PROTECTIONS TO PUBLIC PROVIDED FOR UNDER SRC.

 Full Disclosure Policy – to guide investors when making investment decisions, armed with
necessary information. Though earnings may not be guaranteed, the state may guarantee
full availability of information as to the corporation with respect to the security.
 Tender Offer – you have a person or a group of persons “who want to take over a company”
longing to obtain a controlling interest in a corporation. May be voluntary or mandatory
tender offer. This protection is for the benefit of the minority shareholder. Assuming Mr.
Ganid wants to purchase shares of ML Corp from Mr. Bahite and Ms. Balimbing, which
constitutes a total of 35% of OCS of ML Corp. The current value of ML Corp is P10 per share
but Mr. Ganid is purchasing it from Bahite and Balimbing at P15 per share. After purchasing
those shares, Mr. Ganid is required to offer the same terms to the remaining SH holding the
65% of ML Corp’s equity.
 The reason for making tender offer mandatory is to give minority shareholders the
chance of selling at a high price (similar to the standing of a controlling shareholder)
when somebody wants to gain control of a listed company.
o Mandatory –

1st instance. Plan to buy (one-time purchase) by a Stranger to the corp. threshold is
35% kasi once you have this, you are guaranteed seat in the board. What more kung
higher diba? That’s why once 35% will be obtained, there must be a mandatory tender
offer.

2nd instance. Plan to buy by an Existing SH. In this case, the threshold is 50%.
Example, Mr. Balmond is the owner of 37% of the OCS of ML Corp. Later, he wants to
obtain more control over the corp. Thus, he is planning to purchase the shares of other
SH. If he buys additional shares amounting to 13% or below, he is not required to make
a prior mandatory tender offer, since his shareholding will not breach the 50% threshold
 for existing SH. However, if the additional shares that he will make will constitute at
least 14%, then he is now required to make a mandatory tender offer.

**This mandatory tender offer rule covers not only direct acquisition but also
indirect acquisition (those owned by subsidiaries, alter ego corporations, etc) or any
type of acquisition. The minority SH can demand from the buying person to make a
tender offer to them at the same price and terms as those made before by the buying
person in obtaining the controlling shareholding, in order to give the minority the
opportunity to opt out of the corporation with a price at par of that of the selling SH. (it
is in fact a mandatory tender offer “to buy” the shares of the minority)

PRESCRIPTIVE PERIOD
 Of filing a complaint for FALSE REGISTRATION and PROSPECTUS:
2 years from discovery, but within 5 years from bona fide sale to the public