Part II: Securities Law

Securities Regulation Code (SRC); R.A. No. 8799 (2000)

1. State Policy (Sec. 2, SRC)

SEC. 2. Declaration of State Policy. – The State shall establish a 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.

To achieve these ends, this Securities Regulation Code is hereby enacted. (JULY 7,
2000)

2. Definition of Securities (Sec. 3, SRC)

“Securities” are shares, participation or interests in a corporation or in a
commercial enterprise or profit-making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in character. It includes:

(a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-

backed securities;
(b) Investment contracts, certificates of interest or participation in a profit sharing
agreement, certificates of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates,
voting trust certificates or similar instruments;
(f) Proprietary or non proprietary membership certificates incorporations; and
(g) Other instruments as may in the future be determined by the Commission.

2.1. Definition of various securities (see SRC Implementing rules)

2.1.1. Equity securities vis-à-vis Debt securities

Debt securities/instruments include any evidence of indebtedness

such as bonds, notes, debentures, commercial papers, treasury bills,
treasury bonds and other similar instruments as may be determined by
the Commission.

Equity securities include shares of stock in a corporation.

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 Securities Depository holds securities accounts, provides central
safekeeping and asset services, which may include the administration
of corporate actions and redemptions, and plays an important role in
helping to ensure the integrity of securities issues (that is, securities are
not accidentally or fraudulently created or destroyed or their details
changed).

Equity securities are financial assets that represent

ownership of a corporation. The most prevalent type
of equity security is common stock. And the
characteristic that most defines an equity security—
differentiating it from most other types of securities
—is ownership

Debt securities are financial assets that define the

terms of a loan between an issuer (the borrower)
and an investor (the lender). The terms of a debt
security typically include the principal amount to be
returned upon maturity of the loan, interest rate
payments, and the maturity date or renewal date.

2.1.2. Options, warrants and derivatives

Derivative is a financial instrument whose value changes in response to

changes in a specified interest rate, security price, commodity price,
foreign exchange rate, index of prices or rates, credit rating or credit
index, or similar variable or underlying factor It is settled at a future
date. This term shall include, but not limited, to the following:

Options or 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; and

No corporation shall grant or offer any Option to the public unless it is

registered in accordance with Sections 8 and 12 of the Code and Rules 8.1 and
12.1, except when the security is exempt from registration under Sections 9
and 10 of the Code or under these Rules.

Warrants or rights to subscribe or purchase new or existing shares in a

company on or before a predetermined date.

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 Warrant Certificate - means the certificate representing the right to a Warrant,
which may or may not be detachable, that is issued by an Issuer to a Warrant
holder.

Derivative is a financial instrument whose value changes in response to the

change in a specified interest rate, security price, commodity price, foreign
exchange rate, index of prices or rates, a credit rating or credit index, or
similar variable or underlying factor. It requires no initial or little net
investment relative to other types of contracts that have similar responses to
changes in market conditions. It is settled at a future date. This term shall
include, but not limited, to the following:

1. 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 by the Commission upon stockholders’
approval.

2. Call options are rights to buy.

3. Put options are rights to sell.

4. 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 the Commission rules and
regulations and/or the Exchange rules. Warrants generally have a longer
exercise period than options and are evidenced by warrant certificates.

2.1.3. Investment contract -An investment contract is a legal document

between two parties where one party invests money with the intent of
receiving a return

In order for a contract to be considered valid to this category it must contain

the following elements which are laid out by the Howey test:
An investment of money
A common enterprise
Profit expectation(s)
Derived from the efforts of others

Although the Howey Test it is not the sole testing method available it is the
most common resource relied on to confirm that an investment contract meets
the criteria of a security.

2.1.3.1. Howey Test

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 The Howey Test refers to the U.S. Supreme Court case for determining
whether a transaction qualifies as an “investment contract.” If a transaction is
found to be an investment contract, it's considered a security

What are the 4 elements of the Howey test?

The Howey Test is a legal framework used in the United States to determine if a
transaction qualifies as an investment contract under securities regulations. The
Howey Test consists of four elements: investment of money, expectation of profits,
common enterprise, and efforts of others

2.1.3.1.1. SEC v. Howey Co., 328 U.S. 293 (1946)

2.1.3.1.2. Power Homes Unlimited Corp. v. SEC and Manero, G.R. No.
164182 (2008)
2.1.3.1.3. SEC v. Prosperity.com, Inc, G.R. No. 164197 (2012)
2.1.3.1.4. SEC v. Santos, G.R. No. 195542 (2014)
2.1.3.1.5. Virata v. Ng Wee, G.R. No. 220926 (2017)

2.1.3.1.6. Other instruments as may be determined by SEC (Sec. 3.1[g],

SRC)
(g) Other instruments as may in the future be determined by the
Commission.

2.1.3.1.7. Is cryptocurrency security?

(SEC v. Ripple, Southern District Court of New York, Case 1:20-cv-
10832-AT-SN, 13 July 2023)

MLM -LEGAL, BECAUSE

WHAT IS A 'SECURITY' UNDER U.S. LAW?

To SEC's contends crypto assets are securities, citing a U.S. Supreme Court
case from 1946 dealing with investors in Florida orange groves owned by the
W. J. Howey Co.
The court ruled that "an investment of money in a common enterprise with
profits to come solely from the efforts of others," is a kind of security called an
investment contract.

The SEC had jurisdiction to seek to prevent Howey from selling to out-of-
state investors fractional land interests with a contract to provide profit from
the harvest, the court said.

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 Securities, unlike assets such as commodities, are strictly regulated and
require detailed disclosures to inform investors of potential risks.

WHAT HAVE OTHER JUDGES SAID?

Many of the SEC's crypto-related cases have ended in settlements, with companies
paying fines and agreeing to follow U.S. law or exiting the U.S. market.
Before the Ripple decision, judges in the few cases decided in court agreed with the
SEC that specific crypto assets were securities.
Those rulings said developers' statements tying the value of their digital assets to
efforts to grow or maintain the associated blockchain systems showed investor
profits depended on the "efforts of others."
Courts have also decided that investors in those assets participated in a "common
enterprise" because the funds they spent were pooled by the token issuer and used to
develop relevant systems.

WHAT ABOUT BITCOIN?

Bitcoin is not considered a security because its anonymous and open-source origins
mean investor profits are not dependent on the efforts of developers or managers,
Some blockchain projects have tried to fund their operations in two stages, by
offering securities under SEC regulations and later giving or selling those investors
cryptocurrency after building a functional blockchain.
Goforth said the developers hoped that approach would remove the "common
enterprise" element, but she added the SEC has never clarified what it would take to
convert a security to a non-security.

3. Kinds of Securities
3.1. Exempt securities (Sec. 9, SRC)
SEC. 9. Exempt Securities. –

9.1. The requirement of registration under Subsection 8.1 shall not as a general rule
apply to any of the following classes of securities:

(a) 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.
(b) 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.
(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved by
the proper adjudicatory body.

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

(e) Any security issued by a bank except its own shares of stock.

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

3.1.1. Union Bank v SEC, G.R. No. 138949 (2001)

3.1.2. Exempt transactions (Sec. 10, SRC)

SEC. 10. Exempt Transactions. –
10.1. The requirement of registration under Subsection 8.1. shall not apply to the sale
of any security in any of the following transactions:
(a) At any judicial sale, or sale by an executor, administrator, guardian or receiver or
trustee in insolvency or bankruptcy.
(b) 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 the provisions of this Code, to liquidate a bona fide
debt, a security pledged in good faith as security for such debt.
(c) 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 and such owner or representative
not being the underwriter of such security.
(d) 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.
(e) 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.
(f) 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.
(g) The issue and delivery of any security in exchange for any other security of the
same issuer pursuant to a right of conversion entitling the holder of the security
surrendered in exchange to make such conversion: Provided, That the security so
surrendered has been registered under this Code or was, when sold, exempt from
the provisions of this Code, and that the security issued and delivered in exchange,
if sold at the conversion price, would at the time of such conversion fall within the
class of securities entitled to registration under this Code. Upon such conversion the

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par value of the security surrendered in such exchange shall be deemed the price at
which the securities issued and delivered in such exchange are sold.
(h) Broker’s transactions, executed upon customer’s orders, on any registered
Exchange or other trading market.
(i) 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.
(j) 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.
(k) The sale of securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period. (l) The sale of securities to any
number of the following qualified buyers:
(i) Bank; chanroblespublishingcompany
(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 managed 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 by rule determine as qualified
buyers, on the basis of such factors as financial sophistication, net worth,
knowledge, and experience in financial and business matters, or amount of assets
under management.

10.2. The Commission may exempt other transactions, if it finds that the
requirements
of registration under this Code is not necessary in the public interest or for the
protection of the investors such as by reason of the small amount involved or the
limited character of the public offering. 10.3. Any person applying for an exemption
under this Section, shall file with the Commission a notice identifying the exemption
relied upon on such form and at such time as the Commission by rule may prescribe
and with such notice shall pay to the Commission a fee equivalent to one-tenth
(1/10) of one percent (1%) of the maximum aggregate price or issued value of the
securities.

3.1.3. Non-exempt transactions (Sec. 8, SRC)

SEC. 8. Requirement of Registration of Securities. –
8.1. 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
Commission. Prior to such sale, information on the securities, in such form and with

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such substance as the Commission may prescribe, shall be made available to each
prospective purchaser.

8.2. The Commission may conditionally approve the registration statement under
such terms as it may deem necessary.

8.3. The Commission may specify the terms and conditions under which any written
communication, including any summary prospectus, shall be deemed not to
constitute an offer for sale under this Section.

8.4. A record of the registration of securities shall be kept in a Register of Securities

in which shall be recorded orders entered by the Commission with respect to such
securities. Such register and all documents or information with respect to the
securities registered therein shall be open to public inspection at reasonable hours
on business days. chanroblespublishingcompany

8.5. 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 insure full disclosure or to protect the interest of the investors
and the public in general.

4. Powers and Functions of Securities and Exchange Commission

4.1. Sec. 5, SRC.
SEC. 5. Powers and Functions of the Commission.- 5.1. The Commission shall act
with transparency and shall have the powers and functions provided by this Code,
Presidential Decree No. 902-A, the Corporation Code, the Investment Houses Law,
the Financing Company Act and other existing laws. Pursuant thereto the
Commission shall have, among others, the following powers and functions:

(a) Have jurisdiction and supervision over all corporations, partnerships or

associations who are the grantees of primary franchises and/or a license or permit
issued by the Government;

(b) 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 amendments thereto;

(c) Approve, reject, suspend, revoke or require amendments to registration

statements, and registration and licensing applications;

(d) Regulate, investigate or supervise the activities of persons to ensure compliance;

(e) Supervise, monitor, suspend or take over the activities of exchanges, clearing
agencies and other SROs;

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(f) Impose sanctions for the violation of laws and the rules, regulations and orders
issued pursuant thereto;

(g) 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;

(h) 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
this Code;

(i) Issue cease and desist orders to prevent fraud or injury to the investing public;

(j) Punish for contempt of the Commission, both direct and indirect, in accordance
with the pertinent provisions of and penalties prescribed by the Rules of Court;

(k) Compel the officers of any registered corporation or association to call meetings
of stockholders or members thereof under its supervision;

(l) 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;

(m) Suspend, or revoke, after proper notice and hearing the franchise or certificate
of registration of corporations, partnerships or associations, upon any of the
grounds provided by law; and

(n) 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.

5.2. The Commission’s jurisdiction over all cases enumerated under Section 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court: Provided, that the Supreme
Court in the exercise of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over these cases.The Commission shall
retain jurisdiction over pending cases involving intra-corporate disputes submitted
for final resolution which should be resolved within one (1) year from the enactment
of this Code. The Commission shall retain jurisdiction over pending suspension of
payments/rehabilitation cases filed as of 30 June 2000 until finally disposed.

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 4.1.1. Power to grant exemptive relief (Sec. 12.2)
SEC. 12. Procedure for Registration of Securities. –

12.2. In promulgating rules governing the content of any registration

statement (including any prospectus made a part thereof or annexed
thereto), the Commission may require the registration statement to
contain such information or documents as it may, by rule, prescribe. It
may dispense with any such requirement, or may require additional
information or documents, including written information from an
expert, depending on the necessity thereof or their applicability to the
class of securities sought to be registered. chanroblespublishi

4.1.2. Sec. 13.2.

13.2. The Commission may compel the production of all the books and
papers of such 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.

4.1.3. Reserved powers (Sec. 3.1(g), SRC)

3.1. “Securities” are shares, participation or interests in a corporation

or in a commercial enterprise or profit-making venture and evidenced
by a certificate, contract, instrument, whether written or electronic in
character. It includes:

(g) Other instruments as may in the future be determined by the

Commission.

5. Procedure for Registration of Securities

5.1. Sec. 12, SRC.
SEC. 12. Procedure for Registration of Securities. –
12.1. All securities required to be registered under Subsection 8.1 shall be registered
through the filing by the issuer in the main office of the Commission, of a sworn
registration statement with respect to such securities, in such form and containing
such information and documents as the Commission shall prescribe. The
registration statement shall include any prospectus required or permitted to be
delivered under Subsections 8.2, 8.3 and 8.4.

12.2. In promulgating rules governing the content of any registration statement

(including any prospectus made a part thereof or annexed thereto), the Commission
may require the registration statement to contain such information or documents as
it may, by rule, prescribe. It may dispense with any such requirement, or may

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require additional information or documents, including written information from an
expert, depending on the necessity thereof or their applicability to the class of
securities sought to be registered.

12.3. 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.

12.4. The registration statement shall be signed by the issuer’s executive officer, its
principal operating officer, its principal financial officer, its comptroller, principal
accounting officer, its corporate secretary or persons performing similar functions
accompanied by a duly verified resolution of the board of directors of the issuer
corporation. 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. 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.

12.5. (a) Upon filing of the registration statement, the issuer shall pay to the
Commission a fee of not more than one-tenth (1/10) of one per centum (1%) of the
maximum aggregate price at which such securities are proposed to be offered. The
Commission shall prescribe by rule diminishing fees in inverse proportion to the
value of the aggregate price of the offering. (b) Notice of the filing of the registration
statement shall be immediately published by the issuer, at its own expense, in two
(2) newspapers of general circulation in the Philippines, once a week for two (2)
consecutive weeks, or in such other manner as the Commission by rule shall
prescribe, reciting that a registration statement for the sale of such security has been
filed, and that the aforesaid registration statement, as well as the papers attached
thereto are open to inspection at the Commission during business hours, and copies
thereof, photostatic or otherwise, shall be furnished to interested parties at such
reasonable charge as the Commission may prescribe.

12.6. Within forty-five (45) days after the date of filing of the registration statement,
or by such later date to which the issuer has consented, the Commission shall
declare the registration statement effective or rejected, unless the applicant is
allowed to amend the registration statement as provided in Section 14 hereof. 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 impose such terms and conditions as
may be necessary or appropriate for the protection of the investors.
12.7. 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. Any untrue statement of fact or omission to state a material fact required

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to be stated therein or necessary to make the statement therein not misleading shall
constitute fraud.

5.1.1. Prospectus requirement

3.11. “Prospectus” is the document made by or on behalf of an issuer, underwriter
or dealer to sell or offer securities for sale to the public through a registration
statement filed with the Commission.

The Securities Act requires the delivery of prospectuses to investors who buy
securities from an issuer or from underwriters or dealers who participate in a
registered distribution of securities

8.1.3. Prospectus Delivery Requirements

8.1.3.1. The prospectus shall be submitted to the Commission as part of the
registration statement.

8.1.3.2. Securities required to be registered pursuant to Sections 8 and 12 of the Code

shall not be offered for sale or sold unless the prospectus, or any information
material which has been filed with the registration statement in the form and
containing the information described below, has been widely disseminated and
sufficient copies have been made available to interested parties. Further, the
prospectus contains the following statement in bold face print, at least 12 point type
prominently displayed:

A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN

FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, BUT HAS NOT
YET BEEN DECLARED EFFECTIVE. NO OFFER TO BUY THE SECURITIES CAN
BE ACCEPTED AND NO PART OF THE PURCHASE PRICE CAN BE RECEIVED
UNTIL THE REGISTRATION STATEMENT HAS BECOME EFFECTIVE THEREBY,
AND ANY SUCH OFFER MAY BE WITHDRAWN OR REVOKED, WITHOUT
OBLIGATION OR COMMITMENT OF ANY KIND, AT ANY TIME PRIOR TO THE
NOTICE OF ITS ACCEPTANCE. AN INDICATION OF INTEREST IN RESPONSE
HERETO INVOLVES NO OBLIGATION OR COMMITMENT OF ANY KIND. THIS
PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR BE
CONSIDERED A SOLICITATION OF AN OFFER TO BUY

. 8.1.3.3. In addition to the requirements of this Rule, the prospectus shall contain the
information required by SRC Rule 12.1 and Form 12-1 and shall be prepared in
accordance with the requirements of Rule 72.1. The contents of the prospectus shall
be worded in a language that can be understood by an ordinary person. Page
/40[217 2015 SHe 1RR 8.1.3.4. The prospectus is presumed to have been widely
disseminated or circulated if copies were distributed initially and additional copies
were furnished promptly, upon request, to the following:

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 8.1.3.4.1. All the participants in the distribution (e.g., underwriters and brokers);
8.1.3.4.2. The principal office ofthe Commission; 8.1.3.4.3. An Exchange, if the
securities will be listed; and
8.1.3.4.4. Twenty (20) or more persons who are not qualified buyers under Section
10.1(I) of the Code

5.1.2. Registration statement

3.12. “Registration statement” is the application for the registration of securities
required to be filed with the Commission. It easier to assist

5.1.2.1. Shift from “merit-based” to “full disclosure” regime

Disclosure-based means that the gatekeeper avoids making such a merit

judgment and all risk is placed on the investor on the basis of full disclosure.

In merit based regulation, it is a paternalistic attempt to improve or to

develop the fairness between the relationship between the sellers and buyers
of the securities in the capital market. These models also act as a shield to
protect the public investors from the risks involved in acting on impulse.

5.1.3. Underwriting of securities

What is underwriting of securities?
In the securities market, underwriting involves determining the risk and price of a
particular security. It is a process seen most commonly during initial public
offerings, wherein investment banks first buy or underwrite the securities of the
issuing entity and then sell them in the market.

“Underwriter” is a person who guarantees on a firm commitment and/or declared

best effort basis the distribution and sale of securities of any kind by another
company.

5.1.3.1. Investment Houses Law (P.D. No. 129, as amended by P.D. No.
590, B.P. Blg. 66, and R.A. No. 8366)

WHEREAS, the recommendations, as endorsed with modifications by the monetary

authorities and made the basis of this Decree, advocated the enactment of the
statutory framework within which the underwriting of securities may be governed
and, to the extent that these entities perform quasi-banking functions, to harmonize
their operations with national monetary goals.

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SECTION 2. Scope. — Any enterprise which engages in the underwriting of
securities of other corporations shall be considered an "Investment House" and shall
be subject to the provisions of this Decree and of other pertinent laws.

Nothing in this Decree shall be understood to preclude other enterprises from

engaging in the mere buying and selling of short-term securities of other persons or
enterprises.

SECTION 3. Definitions. — For the purpose of this Decree, unless the context
otherwise indicates, the following definition of terms are hereby adopted:
(a) "Underwriting" is the act or process of guaranteeing the distribution and sale of
securities of any kind issued by another corporation.
(b) "Securities" are written evidences of ownership, interest, or participation, in an
enterprise, or written evidences of indebtedness of a person or enterprise. It includes,
but is not limited to the instruments enumerated in Section 2 of the Securities
Act (Commonwealth Act No. 83, as amended).

SECTION 8. Capital requirements. — The minimum initial paid-in capital of any

Investment House shall be Twenty Million (P20,000,000) Pesos: Provided, That the
Monetary Board of the Central Bank may prescribe a higher minimum capitalization
if warranted by the circumstances. (as amended by PD No 1797)

SECTION 9. Credit policies. — Investment Houses shall coordinate their credit

policies with the general credit policies of the Monetary Board of the Central Bank.

SECTION 10. Reports. — Investment Houses shall submit to the Securities and
Exchange Commission and to the Central Bank a semi-annual report of operations
and financial condition, signed under oath by its chief accountant and verified by its
president.
The Securities and Exchange Commission may, at its discretion, require Investment
Houses to include their underwriting commitments as contingent accounts in their
financial statements.

SECTION 11. Regulations. — Within six months after the approval of this Decree,
the Securities and Exchange Commission, in coordination with the Central Bank,
shall promulgate the necessary rules and regulations implementing the provisions of
this Decree.

SECTION 12. Central Bank regulatory powers. — Investment Houses shall be

subject to such regulations of the Central Bank or non-bank financial intermediaries
as may be promulgated pursuant to Section 2-B of Republic Act No. 337, as
amended. The regulations which may include, but need not be limited to (a)
minimum size of fund acceptance or receipt, (b) methods of marketing and
distribution, (c) terms of placement and maturities, and (d) uses of funds may be
modified by the Monetary Board insofar as they apply to Investment Houses.

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The Monetary Board may, at its discretion, determine whether Investment Houses
may be permitted to perform quasi- banking functions as defined in Section 2-D,
subsection (b) of Republic Act No. 337, as amended. The Monetary Board is hereby
authorized, at its discretion, to require any enterprise which is engaged or proposes to
engage in quasi-banking functions to incorporate as an Investment House. If the
Monetary Board decides to permit Investment Houses to engage in quasi-banking
functions, the Board may require as a condition precedent the obtaining of a
certificate of authority for the purpose from the Monetary Board.
Whenever the Monetary Board authorizes an Investment House to engage in quasi-
banking functions, in accordance with the provisions of this section, the Board may
subject Investment Houses to further regulations, pursuant to Republic Act 337, as
amended, which may include but need not necessarily be limited to (a) liquidity
reserve requirements; (b) capital-to-risk assets ratios; (c) interest rate ceilings; and (d)
such other constraints as the Board may deem necessary.
In the exercise of its authority in this section, the Monetary Board may, whenever, it
determines that the circumstances so warrant subject an Investment House to special
examination.

Whenever on the basis of the reports submitted by, or upon examination of the books
and records of, an Investment House, the Central Bank finds that the Investment
House is not complying with the provisions of this section, with the pertinent
provisions of this Decree, of other laws, or of orders, instructions, rules or regulations
issued by the Monetary Board pertaining to non-bank financial intermediaries and
quasi-banking activities, said Board shall forthwith issue a cease-and-desist order
upon the Investment House to comply with the cease-and-desist order shall subject
said Investment House to fine not exceeding two hundred (P200) pesos for every day
the order is violated, to be imposed by the Monetary Board, without prejudice to the
penalties provided in Section 16 of this Decree.

SECTION 13. Applicability of Securities Act. — An Investment House may engage

in the business of a dealer or a broker under the Securities Act without obtaining a
separate license for the purpose as required in Section 14 of the Securities Act (C.A.
No. 83, as amended).
SECTION 14. Applicability of Corporation Law. — The provisions of the
Corporation Law (Act No. 1459, as amended) insofar as they are not in conflict or
inconsistent with the provisions of this Decree shall apply to Investment Houses.

5.1.3.2. Firm commitment vis-à-vis best efforts commitment

The first form is the firm commitment underwriting. In this form, the
underwriter ensures that all of the securities of the company would be sold.
So, the underwriter makes an underwriting group which will acquire shares
or securities of the company which were unsold. So, this underwriting group
agrees to acquire all of the securities of the company, which are not acquired

15
or
subscribed by the general public, on the agreed price. Generally, this price wo
uld be less than the pricewhich was offered to the general public. This is a
secure way but it is very costly because the price of the securities which is
given or on which the securities are given to the underwriters isless than the
public offering price. On the other hand, it will be secure for the company
because itwill be the responsibility of the underwriter that all of the securities
are taken by underwritinggroup or anyone else.

Another form of underwriting is best efforts underwriting. In this form,

the underwriter is merely the agent of the company who is making all of his
efforts for the subscription of securities of the company. However, the
underwriter will not be responsible if some of the securities of the company
are not taken by anyone. Generally this form will be used where the company
is very much new and it is not known to the public. In such case, the
underwriter would not be willing to take the risk because the company is
very much new and the general public might not be willing to get the
securities of the company. So, the underwriter does not take very much or big
risk in ensuring the sale of these securities

A firm commitment is just that, he/she is committed to the end of whatever is

promised, good or bad. Best efforts is the commitment of their best efforts to the
extent of their training and intelligence.

In my opinion, best effort means to exert up to all of your time, energy, talent, etc to
complete the goal in question.

Firm commitment goes beyond this, insuring that all aspects of the goal are
completed in time and with the upmost quality, without excuse. Even if one has to do
more and spend more that originally estimated to accomplish the goal, it is done
meeting the documented requirements.

Firm commitment underwriting (FCU)- In this case, the underwriter accepts the risk
involved and also agrees to raise the full amount of capital needed if the issue volume
is less than the commitment. FCU is typically reserved for firms with a stronger
financial position or when the investment bank has received indications of interest in
which it demonstrates the ability to resell the shares purchased from the issuer
because the commitment is for the entire capital raised.

Best efforts underwriting (BEU)- Investment bankers commit to trying their utmost
to market an issue to the public in this kind of offering and serving as agents, but do
not guarantee full subscription in case the issue is not fully subscribed. These agents
have the option to acquire and the authority to sell the securities instead of making a
full purchase. Deals with best efforts involve risks from the issuer's perspective.
Mostly, the rating plays an important role in deciding whether to commit to the

16
 underwriting issue or to purchase the whole issue in return and aim to resell it to the
market.

Firm commitment means the investment banks commit to buy all the shares offered
by the company in an IPO and sell them in the stock market.

In best efforts, the Investment bank tries to sell as many shares as possible in the
IPO. All in all out the company either sells all shares in an IPO or none.

Best Efforts vs Firm Commitment:

 In Best Efforts, the underwriter is not obligated to buy all the shares of the company
which are unsold in an IPO. In Firm Commitment underwriter is obligated to buy all the
shares of the company and sell them in the IPO processes.
 In Best Efforts, the underwriter tries to sell as many shares as possible and don’t face any
risk if some shares remain unsold. In Firm Commitment the underwrites face the risk of
unsold shares as it is a loss for the underwrites as it has brought those shares from the
company going public.
 In best efforts underwrites act as an agent. In Firm commitment, the underwriter cannot
act as an agent.
 In best-effort underwriter earns commission fees for selling the shares in an IPO. In Firm
commitment, the underwriter earns a profit by t=selling the shares at a higher price in an
IPO.

Example (Real World):
In September 2015, Aperion Biologics filed an offering statement on Form 1-A with the
securities and exchange commission (SEC) to sell $20 million in an IPO. The agent, WR
Habrecht+ Co., employed the best effort approach to selling the Aperion shares.

As defined in the jumpstart our business startups act (JOBS), Aperion is a small company that
qualifies as an emerging growth company. For the fiscal year ending Sept 30, 2015, revenue was
$34,000. Considering Aperion’s small size, WR Hambrecht chose to underwrite a best-efforts
offering to minimize its risk by not selling the shares. The January 2016 filing registered 3.1
million Aperion shares, and the proposed price range of $7 to $9, with the shares offered on an
all-or-none basis.

Bottom line:
Hence, we can conclude that best efforts, is safer and less risker for the underwriter as he has no
obligation to buy unsold shares. In Firm commitment, he has the risk of buying unsold shares and
can get lost in the share price falls. In Best-Efforts the underwriter gets commission fees for
helping the company sell the shares in an IPO. hence it acts as an agent.

5.1.3.3. Underwriting agreement vis-à-vis subscription agreement

Underwriters and Underwriting Agreements

When a public company wants to invite the public for subscription of its
shares, it has to look upon certain things. Sometimes, a company may be very

17
much new and it is not known to the general public or even to the
commercial community. So, it may sometimes enter into contracts with
investment banks or other institutions that will help the company in
subscription of its shares. In such cases, a company enters into different
agreements and one of the most important agreements in this regard is
underwriting agreements.
Underwriting agreement provides that a company will offers its shares to the
general public andthe underwriters will assist the company in subscription of
its shares. There might be different ways by which the underwriters will
assist the company in subscription of its shares. The underwriting may take
different forms. However, in all such ways the underwriting is used for
selling shares or debentures and it is used for inviting subscription from the
general public.

The underwriter would assist the company because of the agreement

because the underwriter is given commission for his services.
Whenever a public company wants to raise money by giving its shares
or debentures or in other words company is going for public offering
of its securities itwould seek the help of securities market professionals
and this professional would help out thatwhat is the form which this
company should adopt for underwriting.

A subscription agreement is a formal agreement between a company and an investor

to buy shares of a company at an agreed-upon price.
It contains all the details of such an agreement, including Outstanding Shares,
Shares Ownership, and Payouts.
A well organized and well-structured subscription agreement will include the details
about the transaction, the number of shares being sold and the price per share, and
any legally binding confidentiality agreements and clauses.

Underwriting agreement – an agreement between a corporation an a

third person, termed the “underwriter”, by which the latter agrees, for a
certain compensation, to take a stipulated amount of stocks or bonds,
specified in the underwriting agreement, if such securities are not taken
by those to whom they are first offered

Subscription Contract – any contract for the acquisition of unissued

stock in an existing corporation or a corporation still to be formed. It is
considered as such notwithstanding the fact that the parties refer to it as
purchase or some other contract.

18
 5.1.4. Registration of securities vis-à-vis listing of securities

Registration of Securities SEC. 8. Requirement of Registration of Securities. –

8.1. 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
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.
8.2. The Commission may conditionally approve the registration statement under
such terms as it may deem necessary.
8.3. The Commission may specify the terms and conditions under which any written
communication, including any summary prospectus, shall be deemed not to
constitute an offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in a Register of Securities
in which shall be recorded orders entered by the Commission with respect to such
securities. Such register and all documents or information with respect to the
securities registered therein shall be open to public inspection at reasonable hours
on business days.

8.5. 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 insure full disclosure or to protect the interest of the investors
and the public in general.

SEC. 12. Procedure for Registration of Securities. - 12.1. All securities required to be
registered under Subsection 8.1 shall be registered through the filing by the issuer in
the main office of the Commission, of a sworn registration statement with respect to
such securities, in such form and containing such information and documents as the
Commission shall prescribe. The registration statement shall include any prospectus
required or permitted to be delivered under Subsections 8.2, 8.3 and 8.4.

12.2. In promulgating rules governing the content of any registration statement

(including any prospectus made a part thereof or annexed thereto), the Commission
may require the registration statement to contain such information or documents as
it may, by rule, prescribe. It may dispense with any such requirement, or may
require additional information or documents, including written information from an
expert, depending on the necessity thereof or their applicability to the class of
securities sought to be registered.

12.3. 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.

12.4. The registration statement shall be signed by the issuer’s executive officer, its
principal operating officer, its principal financial officer, its comptroller, principal

19
accounting officer, its corporate secretary or persons performing similar functions
accompanied by a duly verified resolution of the board of directors of the issuer
corporation. 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. 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.

12.5. (a) Upon filing of the registration statement, the issuer shall pay to the
Commission a fee of not more than one-tenth (1/10) of one per centum (1%) of the
maximum aggregate price at which such securities are proposed to be offered. The
Commission shall prescribe by rule diminishing fees in inverse proportion to the
value of the aggregate price of the offering. (b) Notice of the filing of the registration
statement shall be immediately published by the issuer, at its own expense, in two
(2) newspapers of general circulation in the Philippines, once a week for two (2)
consecutive weeks, or in such other manner as the Commission by rule shall
prescribe, reciting that a registration statement for the sale of such security has been
filed, and that the aforesaid registration statement, as well as the papers attached
thereto are open to inspection at the Commission during business hours, and copies
thereof, photostatic or otherwise, shall be furnished to interested parties at such
reasonable charge as the Commission may prescribe.

12.6. Within forty-five (45) days after the date of filing of the registration statement,
or by such later date to which the issuer has consented, the Commission shall
declare the registration statement effective or rejected, unless the applicant is
allowed to amend the registration statement as provided in Section 14 hereof. 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 impose such terms and conditions as
may be necessary or appropriate for the protection of the investors.

12.7. 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. Any untrue statement of fact or omission to state a material fact required
to be stated therein or necessary to make the statement therein not misleading shall
constitute fraud.

SRC Rule 32.1 – Trading Limited to Listed Securities and Exchanges Registered
under the Code No Broker Dealer or any registered person shall effect any
transaction in any security in an Exchange or any other trading market, unless such
Exchange or any other trading market and the securities listed or allowed to be

20
traded therein are registered under the Code or exempt from registration pursuant
to Sections 9 and 10 thereof.

5.1.4.1. PSE v. Court of Appeals, G.R. No. 125469 (1997)

5.1.5. Post-registration incidents

12.6. Within forty-five (45) days after the date of filing of the registration
statement, or by such later date to which the issuer has consented, the Commission
shall declare the registration statement effective or rejected, unless the applicant is
allowed to amend the registration statement as provided in Section 14 hereof. 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 impose such terms
and conditions as may be necessary or appropriate for the protection of the
investors.

12.7. 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. Any untrue statement of fact or omission to state a material fact required
to be stated therein or necessary to make the statement therein not misleading shall
constitute fraud.

5.1.5.1. Amendment
SEC. 14. Amendments to the Registration Statement.

14.1. If a registration statement is on its face incomplete or inaccurate

in any material respect, the Commission shall issue an order directing
the amendment of the registration statement. Upon compliance with
such order, the amended registration statement shall become effective
in accordance with the procedure mentioned in Subsection 12.6 hereof.
14.2. An amendment filed prior to the effective date of the registration
statement shall recommence the forty-five (45) day period within
which the Commission shall act on a registration statement. An
amendment filed after the effective date of the registration statement
shall become effective only upon such date as determined by the
Commission.

14.3. If any change occurs in the facts set forth in a registration

statement, the issuer shall file an amendment thereto setting forth the
change.

21
14.4. If, at any time, the Commission finds that a registration statement
contains any false statement or omits to state any fact required to be
stated therein or necessary to make the statements therein not
misleading, the Commission may conduct an examination, and, after
due notice and hearing, issue an Order suspending the effectivity of
the registration statement. If the statement is duly amended, the
suspension order may be lifted.

14.5. In making such examination the Commission or any officer or

officers designated by it may administer oaths and affirmations and
shall have access to, and may demand the production of, any books,
records or documents relevant to the examination. Failure of the
issuer, underwriter, or any other person to cooperate, or his
obstruction or refusal to undergo an examination, shall be a ground for
the issuance of a suspension order.

5.1.5.2. Suspension
SEC. 15. Suspension of Registration. -

15.1. If, at any time, the information contained in the registration

statement filed is or has become misleading, incorrect, inadequate or
incomplete in any material respect, or the sale or offering for sale of the
security registered thereunder may work or tend to work a fraud, the
Commission may require from the issuer such further information as
may in its judgment be necessary to enable the Commission to
ascertain whether the registration of such security should be revoked
on any ground specified in this Code. The Commission may also
suspend the right to sell and offer for sale such security pending
further investigation, by entering an order specifying the grounds for
such action, and by notifying the issuer, underwriter, dealer or broker
known as participating in such offering.

15.2. The refusal to furnish information required by the Commission

may be a ground for the issuance of an order of suspension pursuant
to Subsection 15.1. Upon the issuance of any such order and
notification to the issuer, underwriter, dealer or broker known as
participating in such offering, no further offer or sale of any such
security shall be made until the same is lifted or set aside by the
Commission. Otherwise, such sale shall be void.

15.3. Upon issuance of an order of suspension, the Commission shall

conduct a hearing. If the Commission determines that the sale of any
security should be revoked, it shall issue an order prohibiting 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

22
deemed confidential, and shall not be published, unless it shall appear
that the order of suspension has been violated after notice. If, however,
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.

5.1.5.3. Revocation

SEC. 13. Rejection and Revocation of Registration of Securities. –

13.1. The Commission may reject a registration statement and refuse

registration of the security thereunder, or revoke the effectivity of a
registration statement and the registration of the security thereunder
after due notice and hearing by issuing an order to such effect, setting
forth its findings in respect thereto, if it finds that:
(a) The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provisions of this Code, the rules
promulgated pursuant thereto, or any order of the Commission of
which the issuer has notice in connection with the offering for which a
registration statement has been filed;
(iii) Has been or is engaged or is about to engage in fraudulent
transactions;
(iv) Has made any false or misleading representation of material facts
in any prospectus concerning the issuer or its securities;
(v) Has failed to comply with any requirement that the Commission
may impose as a condition for registration of the security for which the
registration statement has been filed; or (b) 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; or
(c) The issuer, any officer, director or controlling person of the issuer,
or 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 Commission or other
competent judicial or administrative body for violations of securities,
commodities, and other related laws. For purposes of this subsection,
the term “competent judicial or administrative body” shall include a
foreign court of competent jurisdiction as provided for under the Rules
of Court.

23
 13.2. The Commission may compel the production of all the books and
papers of such 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.

13.3. If any issuer shall refuse to permit an examination to be made by

the Commission, its refusal shall be ground for the refusal or
revocation of the registration of its securities.

13.4. If the Commission deems it necessary, it may issue an order

suspending the offer and sale of the securities pending any
investigation. The order shall state the grounds for taking such action,
but such order of suspension although binding upon the persons
notified thereof, shall be deemed confidential, and shall not be
published. Upon the issuance of the suspension order, no further offer
or sale of such security shall be made until the same is lifted or set
aside by the Commission. Otherwise, such sale shall be void. 13.5.
Notice of issuance of such order shall be given to the issuer and every
dealer and broker who shall have notified the Commission of an
intention to sell such security. 13.6. A registration statement may be
withdrawn by the issuer only with the consent of the Commission.

6. Prohibitions on Fraud, Manipulation, and Insider Trading

6.1. Manipulation of security prices (Sec. 24, SRC)

SEC. 24. Manipulation of Security Prices; Devices and Practices. –

24.1 It shall be unlawful for any person acting for himself or through a dealer or broker,
directly or indirectly: (a) To create a false or misleading appearance of active trading in any
listed security traded in an Exchange or any other trading market (hereafter referred to
purposes of this Chapter as “Exchange”): (i) By effecting any transaction in such security
which involves no change in the beneficial ownership thereof; (ii) By entering an order or
orders for the purchase or sale of such security with the knowledge that a simultaneous order
or orders of substantially the same size, time and price, for the sale or purchase of any such
security, has or will be entered by or for the same or different parties; or (iii) By performing
similar act where there is no change in beneficial ownership. (b) To effect, alone or with
others, a series of transactions in securities that: (i) 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; (ii) 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; or (iii) Creates active
trading to induce such a purchase or sale through manipulative devices such as marking the
close, painting the tape, squeezing the float, hype and dump, boiler room operations and such
other similar devices. (c) 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

24
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. (d) 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. (e) To effect, either alone or
others, any series of transactions for the purchase and/or sale of any security traded in an
Exchange for the purpose of pegging, fixing or stabilizing the price of such security, unless
otherwise allowed by this Code or by rules of the Commission.

24.2. No person shall use or employ, in connection with the purchase or sale of any security
any manipulative or deceptive device or contrivance. Neither shall any short sale be effected
nor any stop-loss order be executed in connection with the purchase or sale of any security
except in accordance with such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the protection of investors. 24.3. The
foregoing provisions notwithstanding, the Commission, having due regard to the public
interest and the protection of investors, may, by rules and regulations, allow certain acts or
transactions that may otherwise be prohibited under this Section.

6.1.1. Pump and dump

24.1.5.4. Engaging in buying activity at increasingly higher prices and then selling
securities in the market at the higher prices (hype and dump) or vice versa (i.e.
selling activity at lower prices and then buying at such lower prices);

6.1.2. Short sales (Rule 24.2-2, 2015 SRC IRR)

Rule 24.2-2 - Short Sales

24.2-2.1. Definition of Short Sale The term "short sale" shall mean any sale of a
security which the seller does not own or any sale which is consummated by the
delivery of a security borrowed by, or for the account of the seller with the comm
itment of the seller or securities borrower to return or deliver said securities or their
equivalent to the lender on a determined or determinable future date. A person shall
be deemed to own a security if: (1) he or his agent has title to it; (2) he has
purchased, or has entered into an unconditional contract, binding on both parties
thereto, to purchase it and has not yet received it; (3) he owns a security convertible
into or exchangeable for it and has tendered such security for conversion or
exchange; (4) he has an option to purchase or acquire it and has exercised such
option; or (5) he has rights or warrants to subscribe to it and has exercised such
rights or warrants provided, however, that a person shall be deemed to own
securities only to the extent he has a net long position in such securities.

24.2-2.2. Determination of Good Delivery No Broker or Dealer shall accept a long

sale order from a customer unless he has made a determination that the customer
owns the security and will deliver in good deliverable form within the settlement

25
period provided by exchange or clearing agency, or as may be prescribed by the
Commission. The determination must include a notation on the order ticket at the
time the order is taken which reflects the conversation with the customer regarding
the present location of the securities, whether they are in good deliverable form, and
the customer's ability to make delivery.

24.2-2.3. Order for Short Sale Upon receiving an order to sell short a qualified
security, the order should be indicated on the selling order and throughout all the
records pertinent to the sale. Prior to acceptance of any short sale order, the broker
dealer shall make a determination that the customer has already borrowed the
security and such will be delivered in good deliverable form within the prescribed
settlement period. 24.2-2.4. Definition of Qualified Security For purposes of this rule,
the term qualified security shall mean a listed security that is eligible for short
selling in accordance with the following standards: (1) market capitalization; (2)
tradability; (3) liquidity; and (4) with other applicable guidelines as may be
prescribed by the Commission. Page 700f217 2015 SRe 11m

24.2-2.5. Execution of Short Sale Uptick Rnle No broker or dealer shall use any
facility of a securities exchange to effect a short sale of any security unless (I) at a
price higher than the last sale or (2) at the price of the sale if that price is above the
next preceding different sale price on such day. Unless otherwise provided by the
Commission, this price requirement shall not apply to a sale due to a bona fide
market-making or arbitrage activity executed by a broker dealer authorized to
engage in such activities.

24.2-2.6. Failure to Deliver No person shall, directly or indirectly, by the use of any
facility of a sec unties exchange, effect a short sale in a security registered or listed
on any securities exchange, where the seller does not intend or is unable to make
delivery of the securities within the prescribed settlement period. Failure on the part
of the seller to make delivery on such date will be construed by the Commission as
prima facie evidence of the lack of intention on his part to make such delivery.

6.1.3. Option trading (Sec. 25, SRC)

SEC. 25. Regulation of Option Trading. – No member of an Exchange shall, directly
or indirectly endorse or guarantee the performance of any put, call, straddle, option
or privilege in relation to any security registered on a securities exchange. The terms
“put”, “call”, “straddle”, “option”, or “privilege” shall not include any registered
warrant, right or convertible security.

6.1.3.1. Prohibition on Option Trading under 2015 SRCIRR

26.3. Prohibited Representations, Dealings and Solicitations It shall be

unlawful for any:

26
 26.3.1. Person to represent that he has been registered as a securities
intermediary with the Commission unless such person is registered under the
Code. Provided, registration under the Corporation Code shall not be deemed
to be registration under the Code;

26.3.2. Broker Dealer to represent that the registration of the Broker Dealer
under the Code, or the failure of the Commission to deny, suspend, or revoke
such registration, indicates in any way that the Commission has passed upon
or approved the financial standing, business, or conduct of such Broker
Dealer, or the merits of any security or any transaction/s conducted thereby;

26.3.3. Person to represent that a security is a particular type of security

when such representation is inconsistent with a stated definition under the
Code or rules or regulations adopted thereunder.

26.3.4. Person to represent that a security to be sold, transferred, pledged,

mortgaged, encumbered, used for delivery, or any other purpose to another
entity or itself has been legally authorized by the registered owner when such
representation is not true and documented in writing at the time and date it
was used. Page 72 oJ217 2015 SRC lRR

26.3.5. Person, whether as principal or agent, to buy, sell or deal in securities

or solicit investments in securities and other investment contracts, unless he
is a registered broker, dealer or licensed salesman of a broker dealer and the
securities are registered under the Code or exempt from registration pursuant
to Sections 9 and 10 thereof.

6.1.4. Fraudulent transactions

A fraudulent transaction is an unauthorized or illegal activity involving the use of
payment instruments or financial systems, typically for the purpose of obtaining
money, goods, or services without proper consent or authorization from the account
holder.

6.1.4.1. Anti-fraud provision (Sec. 26, SRC)

SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or sale of any securities to:

26.1. Employ any device, scheme, or artifice to defraud;

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26.2. Obtain money or property by means of any untrue statement of a material fact
of any omission to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were made, not
misleading; or 26.3. Engage in any act, transaction, practice or course of business
which operates or would operate as a fraud or deceit upon any person.

6.1.4.2. Ponzi schemes

A Ponzi scheme is a swindling investment scheme to attract new investors by
promising them a high rate of return and low or zero risks. The money
infused by these new investors is not further invested but used to pay off
profit to the earlier investors.

In a Ponzi scheme, victims simply invest, while pyramid

schemes involve getting investors to help recruit new
victims: Ponzi Scheme Operation – In a Ponzi scheme,
investors make an up-front investment in what appears
to be a legitimate security or other investment product.

6.1.4.3. Investment Fraud (Sec. 3, 11, Financial Consumer Protection

Act, R.A. No. 11765 [2022])

Section 3. Definition of Terms. - As used in this Act:

(a) Financial consumer refers to a person or entity, or their duly appointed

representative, who is a purchaser, lessee, recipient, or prospective purchaser, lessee or
recipient of financial products or services. It shall also refer to any person, natural or
juridical, who had or has current or prospective financial transaction with a financial
service provider pertaining to financial products or services;

(b) Financial consumer complaint refers to an expression of dissatisfaction submitted by

a financial consumer against a financial service provider relative to a financial product or
service in which a response or resolution is expected;

(c) Financial product or service refers to financial products or services which are
developed or marketed by a financial service provider which may include, but are not
limited to, savings, deposits, credit, insurance, pre-need and health maintenance
organization (HMO) products, securities, investments, payments, remittances and other
similar products and services. This also includes digital financial products or services
which pertain to the broad range of financial services accessed and delivered through
digital channels;

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 (d) Financial regulators refer to the Bangko Sentral ng Pilipinas (BSP), Securities and
Exchange Commission (SEC), Insurance Commission (IC), and the Cooperative
Development Authority (CDA);

(e) Financial service provider refers to a person, natural or juridical, which provides
financial products or services that are under the jurisdiction of financial regulators as
defined in this Act. This term shall include Investment Advisers as defined under Section
7 of this Act

(f) Investment fraud refers to any form if deceptive solicitation of investments from the public.
This includes Ponzi schemes and such other schemes involving the promise or offer of profits or
returns which are sourced from the investments or contributions made by the investors
themselves, boiling room operations, and the offering or selling of investment schemes to the
public without a license or permit from the SEC, unless such offering or selling involves exempt
securities or are considered as exempt transactions as provided for under existing laws;

(g) Market conduct refers to the manner by which a financial service provider designs and
delivers its financial products or services and manages its relationships with its clients and the
public;

(h) Marketing refers to the act of communicating, offering, promoting, advertising, or delivering of
financial products or services by financial service providers; and

(i) Responsible pricing refers to the pricing, terms, and conditions of financial products and/or
services that are set in a way that is both affordable to clients and sustainable for financial
service providers by taking into account, among others, client needs and the pricing schemes of
the competitors

g) Market conduct refers to the manner by which a financial service provider designs and
delivers its financial products or services and manages its relationships with its clients and the
public;

(h) Marketing refers to the act of communicating, offering, promoting, advertising, or delivering of
financial products or services by financial service providers; and

(i) Responsible pricing refers to the pricing, terms, and conditions of financial products and/or
services that are set in a way that is both affordable to clients and sustainable for financial
service providers by taking into account, among others, client needs and the pricing schemes of
the competitors

Section 11. Investment Fraud. - It shall be unlawful for any person or persons to commit
investment fraud as defined in this Act. Any person who commits investment fraud shall be
subject to the penalties under Section 73 of Republic Act No. 8799 and the administrative
sanctions under Section 16 of this Act.

6.1.4.4. Is multi-level-marketing (MLM) considered fraudulent

transaction?

What Is an Example of Multilevel Marketing?

Avon is an example of multilevel marketing. The company operates under a model

where sales are driven through a network of salespeople, through presentations, or

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one-on-one settings in homes or businesses. Like a number of other multilevel
marketing businesses, Avon typically does not operate a fixed retail location. The
parent company, instead, provides the tools and resources to entrepreneurs to
conduct their business at various locations. This type of business model is also
referred to as a direct sales model.

Other examples of MLM businesses include Tupperware, Rodan + Fields, Natura &
Co., Vorwerk, Nu Skin, and PM International, among many others.4

The Bottom Line

Multilevel marketing is a legitimate approach to sales, but it does share some
characteristics with illegal pyramid schemes. The key difference between MLM and a
pyramid scheme is that MLM keeps the focus on sales while pyramid schemes
generally focus on recruitment. Even though MLM focuses on sales, earning money
is difficult without also being successful at recruiting additional salespeople and thus
increasing commissions.

6.1.4.5. Chain distribution plans or Pyramid Sales Schemes (Art. 4 (k), 53,
Consumer Act, R.A. No. 7394 [1992]).

k) “Chain distribution plans” or “pyramid sales schemes” means sales

devices whereby a person, upon condition that he makes an investment, is
granted by the manufacturer or his representative a right to recruit for profit
one or more additional persons who will also be granted such right to recruit
upon condition of making similar investments: Provided, That, the profits of
the person employing such a plan are derived primarily from the recruitment
of other persons into the plan rather than from the sale of consumer products,
services and credit: Provided, further, That the limitation on the number of
participants does not change the nature of the plan.

6.1.4.6. Insider trading (Sec. 61)

INSIDER TRADING- is the traiding if a corporation’s stock or

other securities (EX. BONDS OR STOCK OPTIONS), BY
INDIVIDUAL WITH POTENTIAL ACESS TO NON PUBLIC
ABOUT THE COMPANY. IT IS A PRACTICE WHICH AN
INSIDER OR A RELATED PARTIES TRADES BASED ON
MATERIAL NON PUBLIC INFORMATION OBTAINED DURING
THE PERFORMANCE OF THE INSIDER’S DUTIES AT THE
CORPORATION OR OTHERWISE IN BREACH OF A JUDICIARY
OR OTHER RELATIONSHIP OF TRUST AND CONFIDENCE OR
WHEN THE NON PUBLIC INFORMATION WAS
MISAPPROOPRIATED FROM THE COMPANY

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 SEC. 61. Civil Liability on Account of Insider Trading. - 61.1. Any
insider who violates Subsection 27.1 and any person in the case of a
tender offer who violates Subsection 27.4 (a)(i), or any rule or
regulation thereunder, by purchasing or selling a security while in
possession of material information not generally available to the
public, shall be liable in a suit brought by any investor who,
contemporaneously with the purchase or sale of securities that is
the subject of the violation, purchased or sold securities of the same
class unless such insider, or such person in the case of a tender
offer, proves that such investor knew the information or would
have purchased or sold at the same price regardless of disclosure of
the information to him.

61.2. An insider who violates Subsection 27.3 or any person in the

case of a tender offer who violates Subsection 27.4 (a), or any rule or
regulation thereunder, by communicating material non-public
information, shall be jointly and severally liable under Subsection
61.1 with, and to the same extent as, the insider, or person in the
case of a tender offer, to whom the communication was directed
and who is liable under Subsection 61.1 by reason of his purchase
or sale of a security.

6.1.4.7. What is an insider?

An “insider” is an officer, director, 10% stockholder and anyone who possesses inside
information because of his or her relationship with the Company or with an officer,
director or principal stockholder of the Company. Rule 10b-5’s application goes
considerably beyond just officers, directors and principal stockholders. This rule also
covers any employee who has obtained material non-public corporate information, as
well as any person who has received a “tip” from an Insider of the Company
concerning information about the Company that is material and nonpublic, and
trades (i.e. purchase or sells) the Company’s stock or other securities.

This policy also applies to your family members who reside with you, anyone else who
lives in your household, and family members who do not live in your household but
whose securities transactions are directed by you or are subject to your influence or
control, as well as trusts or other entities for which you make investment decisions.

6.1.4.8. Material non-public information

27.2. For purposes of this Section, information is “material nonpublic”
if:
(a) It has not been generally disclosed to the public and would likely
affect the market price of the security after being disseminated to the

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 public and the lapse of a reasonable time for the market to absorb the
information; or (
b) 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.

INFORMATION IS MATERIAL IF IT WOULD AFFECT THE

MARKET PRICE OF A SECURITY TO A SIGNIFICANT EXTENT
AND OR OF FACT WHICH A REASONABLE PERSON WOULD
CONSIDER IN DETERMINING HIS CAUSE OF ACTION WITH
REGARD TO HIS SHARE OF STOCK

7. Protection of Shareholder Interests

7.1. Tender offer rule

TITLE VI Protection of Shareholder Interests Rule 19 –

Tender Offers
19.1. Definitions
19.1.1. "Beneficial owner" shall have the same meaning as defined in SRC
Rule 3. 19.1.2. "Offeror" means any person who makes a tender offer or on
whose behalf a tender offer is made. 19.1.3. "Commencement" means the date
a tender offer is first published, sent or given to security holders.

19.1.4. "Issuer" means any person or entity subject to reporting obligations

under Section 17.2 of the Code.
19.1.5. "Issuer Tender Offer" means a publicly announced intention by an
Issuer to reacquire any of its own class of equity securities, or by an associate
of such Issuer to acquire such securities.
19.1.6. "Security holders" mean holders of record and beneficial owners of
securities that are the subject of a tender offer.
19.1.7. "Target company" means any Issuer whose equity securities are sought
by an Offeror pursuant to a tender offer. Page 44 oJ217 2015 SRC 1M

19.1.8. "Tender offer" means a publicly announced intention by a person acting

alone or in concert with other persons (hereinafter referred to as "person") to acquire
outstanding equity securities of a public company as defined in SRC Rule 3, or
outstanding equity securities of an associate or related company of such public
company which controls the said public company.

19.1.9. "Tender offer materials" mean: (i) the Offeror's formal offer, including
all the material terms and conditions of the tender offer and all their
amendments; (ii) the related transmittal letter (whereby equity securities of

32
 the target company that are sought in the tender offer may be transmitted to
the Offeror or its depository) and all their amendments; and (iii) press
releases, advertisements, letters and other documents published by the
Offeror or sent or given by the Offeror to security holders which, directly or
indirectly, solicit, invite or request tenders of the equity securities being
sought in the tender offer.
19.1.10. "Termination" means the date after which equity securities may not
be tendered pursuant to the tender offer.

19.2. Mandatory Tender Offers

19.2.1. 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, shall file a declaration to that
effect with the Commission.

19.2.2. 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, shall disclose such
intention and contemporaneously make a tender offer for the percentage sought to
all holders of such securities within the said period. 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]

19.2.3. 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 through
the Exchange trading system shall not be required to make a tender offer even if
such person or group of persons acting in concert acquire the remainder through a
block sale if, 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.

19.2.4. 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 shall be required to make a tender offer for all the
outstanding voting shares. 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.

7.2. Rules on proxy solicitation

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-IN PROXY SOLICITATIONS, THE CORPORATION ITSELF ASKS ITS
STOCKHOLDER TO GIVE THEIR PROXY TO THE CORPORATION OR
SOME OTHER ENTITY, UNLIKE IN SEC 57 OF CORPORATION CODE

SEC. 57. Manner of Voting; Proxies. – Stockholders and members may vote in
person or by proxy in all meetings of stockholders or members. When so
authorized in the bylaws or by a majority of the board of directors, the
stockholders or members of corporations may also vote through remote
communication or in absentia: Provided, That the votes are received before
the corporation finishes the tally of votes. A stockholder or member who
participates through remote communication or in absentia, shall be deemed
present for purposes of quorum. Page 29 of 73 The corporation shall establish
the appropriate requirements and procedures for voting through remote
communication and in absentia, taking into account the company’s scale,
number of shareholders or members, structure and other factors consistent
with the basic right of corporate suffrage. Proxies shall be in writing, signed
and filed, by the stockholder or member, in any form authorized in the
bylaws and received by the corporate secretary within a reasonable time
before the scheduled meeting. Unless otherwise provided in the proxy form,
it 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 any one time.

SEC. 20. Proxy Solicitations. –

20.1. Proxies must be issued and proxy solicitation must be made in
accordance with rules and regulations to be issued by the Commission;

20.2. Proxies must be in writing, signed by the stockholder or his duly

authorized representative and filed before the scheduled meeting with the
corporate secretary.

20.3. Unless otherwise provided in the proxy, it 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.

20.4. 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.

20.5. A broker or dealer who holds or acquires the proxy for at least ten per
centum (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 ten (10) days after such acquisition, for its own

34
 account or customer, to the issuer of the security, to the Exchange where the
security is traded and to the Commission.

7.3. Disclosure rule

One of the primary tools for protection of the

public, is through mandatory disclosure of
information not only about securities but also about
the issuer and other persons involved in security
market

Information is disclosed through registration

statements, prospectus, report, and the like. The idea
is that the movement of capital to optimal issues by
furnish the investors the information to evaluate the
return and risk entailed tin a securities investment.

SEC. 8. Requirement of Registration of Securities. – 8.1.

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 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.

Purpose : to afford the public protection from investing

in worthless securities.

CHAPTER V Reportorial Requirements

SEC. 17. Periodic and Other Reports of Issuers. -17.1.
Every issuer satisfying the requirements in Subsection
17.2 hereof shall file with the Commission: (a) Within
one hundred thirty-five (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

35
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.

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