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 SECURITIES REGULATION CODE

 [R.A. No. 8799]
 The ‘Blue Sky Law’

 RA 8799, the Securities Regulation Code (SRC) was

enacted with a view to protect the public from
unscrupulous promoters, who stake business or
venture claims which have really no basis …

 … and sell shares or interests therein to investors

who are then left holding certificates representing
nothing more than a claim to a square of the blue
sky.

 --Dean Cesar L. Villanueva

 Joseph McKenna [1843-1926], a
U.S. Supreme Court justice in the
early years of the 20th century, is
credited with originating the term "blue
sky stock," to refer to speculative
schemes that have no real value for
investors.

In his opinion in the 1917 case of Hall

vs. Geiger-Jones Co., McKenna wrote
that such investments had "no more
basis than so many feet of blue sky."
Evolution of Securities Regulation in the
Philippines:

 In the beginning … there was no securities

regulation law.

 Then came Strong vs. Repilde, 6 Phil. 680 (1906).

 Plaintiff filed action to recover 800 shares of
stock sold by an agent, arguing that:

 Sale by agent void for lack of authority;

 Purchase by buyer was attended by fraud and
deceit, thus vitiating consent.
Strong vs. Repilde:

 SC of the Phils. found for plaintiff, holding

that the sale was void for lack of authority of
the company manager to sell the stocks
which were personal property of the
stockholders.

 The U.S. SC on appeal, affirmed the decision,

holding that defendant is guilty of fraud and
deceit in buying the shares, thus sale was
void pursuant to Art. 1265 of the Phil. Civil
Code.
Strong vs. Repilde:

 Due to the absence of specific securities law

governing it, both the Phil. and US SC
handled the question of fraud or deceit by
way of combining Spanish law on contracts
with American common law governing
corporations.

 The case presented a lesson to the

legislature to enact a law to address similar
situation. But it took 8 years for Congress to
pass the law …
Evolution of Securities Regulation:

 Act 2581 (1914) – “An Act to Regulate the Sale of

Certain Corporation Shares, Stocks, Bonds and
Other Securities” [“The Blue Skies Law”]

 Comm. Act 83 (1926) – The Securities Act – enacted

for failure of Act 2581 to measure up its noble goal
of protecting the investing public. Created the first
SEC.

 Batas Pambansa 178 (1982) – The Revised Securities

Act, plugged the loopholes and enhanced the
regulatory structure laid down in CA No. 83.
RA No. 8799: Securities Regulation Code

 Authored by Sen. Raul S. Roco, SRC was

enacted in the aftermath of the 1987 Asian
Financial Crisis.

 Law put in place structural changes in the

legal framework foremost of which is the
adoption of new regulatory philosophy from
merit based regulation to the policy of full
disclosure with the aim of combating
asymmetric information.
SRC State Policy and Purpose:

 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,
SRC State Policy and Purpose:

 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.
What are Securities:
Securities, defined:

 "Securities" are shares, participation or

interests in a corporation or in a commercial
enterprise or profit-making venture

 … and evidenced by a certificate, contract,

instruments, whether written or electronic
in character.
Securities, include::

 (a) Shares of stocks, bonds, debentures,

notes evidences of indebtedness, asset-
backed securities;

 (b) Investment contracts, certificates of

interest or participation in a profit sharing
agreement, certifies of deposit for a future
subscription;

 (c) Fractional undivided interests in oil, gas

or other mineral rights;
Securities, include::

 (d) Derivatives like option and warrants;

 (e) Certificates of assignments, certificates

of participation, trust certificates, voting
trust certificates or similar instruments

 (f) Proprietary or nonproprietary membership

certificates in corporations; and

 (g) Other instruments as may in the future be

determined by the Commission.
What constitutes INVESTMENT:

FACTS OF THE CASE: An investor enrolls in

petitioner’s program by paying US$234. This
entitles him to recruit two (2) investors who
pay US$234 each and out of which amount he
receives US$92. A minimum recruitment of four
(4) investors by these two (2) recruits, who
then recruit at least two (2) each, entitles the
principal investor to US$184 and the pyramid
goes on

 See: Power Homes vs. SEC, G.R. No. 164182, 26 Feb. 2008
What constitutes INVESTMENT:

ISSUE: Does petitioner’s business operation or

scheme constitute an investment contract that
is a security under R.A. No. 8799.

SEC held in the affirmative. CA affirmed.

HELD (SC): We affirm the ruling of SEC and the

CA that the petitioner was engaged in the sale
or distribution of an investment contract.

 See: Power Homes vs. SEC, G.R. No. 164182, 26 Feb. 2008
Power Homes vs. SEC:

An INVESTMENT CONTRACT is defined in the

Amended IRR of R.A. 8799 as:

 “Contract, transaction or scheme

(collectively ‘contract’) whereby a person
invests his money in a common enterprise
and is led to expect profits primarily from the
efforts of others.”
Power Homes vs. SEC:

 Our SC however notes the ruling of the U.S. SC

in SEC vs. Turner that the element that profits
must come "solely" from the efforts of others
should not be given a strict interpretation.

 It held that a literal reading of the requirement

"solely" would lead to unrealistic results.

 It reasoned out that its flexible reading is in

accord with the statutory policy of affording
broad protection to the public.
Power Homes vs. SEC:

“Our R.A. No. 8799 appears to follow this

flexible concept for it defines an investment
contract as a contract, transaction or scheme
(collectively "contract") whereby a person
invests his money in a common enterprise and
is led to expect profits not solely but primarily
from the efforts of others.”
Power Homes vs. SEC:

“Thus, to be a security subject to regulation by

the SEC, an investment contract in our
jurisdiction must be proved to be:

o (1) an investment of money,

o (2) in a common enterprise,
o (3) with expectation of profits,
o (4) primarily from efforts of others.”
Kinds of Securities and Transactions as to
Registrability:

 Exempt Securities – classes of securities

where registration is not required

 Exempt Transactions – sale of securities

that do not require registration

 Non-Exempt – securities and transaction

involving them that require registration
How RA 8799 Regulate Securities
and Securities Transactions:
Regulatory Controls Under the SRC:

1. Registration of Securities – law requires registration

of sales of securities in PH

2. Registration of Market Participants – law requires

registration of those who participate in the sale or
offer of sale of securities

3. Mechanism to Ensure Sound Market – law to ensure

sound, fair and equitable principles, prevent market
manipulation

4. Expanded SEC Powers as Market Regulator – SEC

given investigatory powers, stripped off quasi-judicial
ppwers under PD 902-A.
 GENERAL RULE:

Securities shall not be sold or offered for sale

or distribution in the Philippines, without a:

 [1] Registration Statement

 [2] duly filed with and
 [3] approved by the SEC.

EXCEPT:

 [1] Exempt Securities

 [2] Exempt Transactions
Procedure for Registration:

1. APPLICATION – issuer files a sworn Registration

Statement with SEC

2. PROSPECTUS – registration shall include any

prospectus required or permitted to be delivered;

3. OTHER INFORMATION – shall disclose effect of the

securities issue on ownership, on the mix of
ownership, especially foreign and local ownership

4. SIGNATORIES TO REG. STATEMENT – must be signed

by those required to sign

5. WRITTEN CONSENT OF EXPERT – shall be included

Procedure for Registration:

6. CERTIFICATION BY SELLING STOCKHOLDERS –

selling stockholders should state the accuracy of any
part of the registration statement

7. FEES – shall be paid to the SEC

8. NOTICE AND PUBLICATION – filing of statement shall

be published: 2 newspaper of general circulation in
the Phils., once a week for two consecutive weeks

9. PRODUCE BOOKS – if required by SEC

10.RULING – SEC to rule on application within 45 days

after date of filing
Exempt Securities
Exempt Securities:

 Those issued or guaranteed by the

government or by any political subdivision,
agency or by any person controlled or
supervised by, and acting as an
instrumentality of the government.

 Those issued or guaranteed by the

government of of any country with which the
Philippines has diplomatic relations, or by
any state, province, or political subdivision
thereof on the basis of reciprocity.
Exempt Securities:

 Those issued by the receiver or by the

trustee in a bankruptcy duly approved by the
proper adjudicatory body.

 Those involving the sale or transfer of which,

by law, is under the supervision and
regulation of the HLURB.

 Those issued by a bank, except its own

shares.
Exempt Transactions:
Exempt Transactions:

 At any judicial sale, or sale by an executor,

administrator, guardian or receiver or trustee
in insolvency or bankruptcy.

 Those sold by pledgee, mortgagee or other

similar lienholder, to liquidate a bona fide
debt, a security pledged in good faith as
security for such debt.
Exempt Transactions:

 Those sold or offered for sale in an isolated

transaction, subscription or delivery by the
owner or for his account, such transaction not
being made in the course of repeated and
successive transactions, and such owner not
being an underwriter

 Distribution by the corporation, actively

engaged in business authorized by its
articles, of securities to its stockholders or
other security holders as a stock dividend or
other distribution out of surplus.
Exempt Transactions:

 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.

 Issuance of secured bonds or notes, where

entire mortgage together with all the bonds
and notes secured thereby are sold to a
single purchaser at a single sale.
Exempt Transactions:

 The issuance and delivery of any security in

exchange for any other security of the same
issuer pursuant to a right of conversion.

 Provided, That the security so surrendered

has been registered under this Code or was,
when sold, exempt from the provision of this
Code xxx.
Exempt Transactions:

 Broker’s transactions executed upon the

customer’s orders but not those made upon
broker’s solicitation;

 Share subscriptions [1] prior to incorporation

or [2] in pursuance of an increase in its
authorized capital stock -- WHEN (a) no
expense is incurred, or (b) no commission,
compensation, or remuneration is paid or
given, in connection with the sale or
disposition of such securities.
Exempt Transactions:

 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) Sale by an issuer to fewer than 20 persons

in the Philippines during any 12-month period.
Exempt Transactions:

 The sale to any number of the following qualified

buyers:

 Bank;
 Registered investment house;
 Insurance company;
 Pension fund or retirement plan maintained by the
Government or any political subdivision thereof or
managed by a bank or banking institution.
 Investment company or;
 Such other person as the Commission may rule by
determine as qualified buyers,
Regulation of Market Participants
Securities Market Professionals

1. BROKER – those who buy or sell securities for others

2. DEALERS – those who buy or sell for his own account

in the ordinary course of business

3. ASSOCIATED PERSON of a Broker or Dealer – an

employee of a Broker or Dealer who exercises
control and supervision functions

4. SALESMAN – a natural person employed by the

issuer, broker, or dealer as such.
INVESTOR PROTECTION PROVISIONS
UNDER RA NO. 8799
RA 8799 prohibits:

1. Manipulation of Stock Prices -- creating

impression of activity and price movements

2. Manipulative and Deceptive Devices --

committed by using any facility of an
Exchange

3. Option Trading
4. Fraudulent Transactions
5. Insider Trading
Prohibited Manipulations of Security Prices
and Use of Devices and Practices (Sec. 24):
Sec. 24(a): Creating a false or misleading
appearance of active trading:

(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.
Sec. 24(b): Effecting a securities or transaction
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 controlling,
controlled, or commonly controlled company
by others; or

ii. (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.
Sec. 24(c): Circulating or disseminating
information that the price of any security listed
in an Exchange will or is likely to rise or fall:

 by employing manipulative market

operations of any one or more persons

 for the purpose of raising or depressing the

price of the security for the purpose of
inducing the purpose of sale of such
security.
Sec. 24(d): Insider Trading: (BAR)

(d): Making 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.
Sec. 24(e): Effecting a 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.
Illustrations of Fraudulent and Manipulative
Acts and Use of Devices
 “WASH SALE”

 Creating appearance of active trading:

 Effect transactions that involve no change

in beneficial ownership

 Entering orders knowing that the same

order of the same size, time, and price is
placed by another
 “MARKING THE CLOSE”

Buying and selling securities at the close

of the market in an effort to alter the
closing price of securities:
 “PAINTING THE TAPE”

 Engaging in a series of transactions that

are reported publicly to give impression
of activity or price movement.
 “SQUEEZING THE FLOAT”

 Taking advantage of a shortage of

securities in the market by controlling
demand side,

 …and exploiting market congestion

during such shortage in a way as to
create artificial prices
 “HYPE AND DUMP”

 Engaging in buying activity at

increasingly higher prices and then
selling the securities at higher prices

 Also called “Pump and Dump”

 “IMPROPER MATCHED ORDER”

Engaging in transactions where the buy

and sell orders are entered at the same
time with the same price and quantity by
different but colluding prices
 “BOILER ROOM OPERATION”

A well organized operation where, in a

room, there well-trained salesmen operate
over several phones using high-pressure
sales talk to get investors to invest in
securities offered.

 Also called “Cold Calls” or “Tele-

marketing” to hype products by false
information.
 “SCALPING”

Where a person, such as an investment

advisor, purchases securities for his own
account before recommending that
security,

… and then sells the share at a profit upon

the rise in the market price following the
recommendation.
ILLUSTRATION: Price Manipulations

“DAISY CHAIN” – a pattern of fictitious

trading activity by a group of persons who
lures innocent people into the scheme.

 Also called “Daisy Garland”

 “FLIPPING”

– where one office buys a particular stock for

customers, while another office simultaneously
recommends that its customers to sell the
stock,

… with the stock being shifted from one office

to another, and the firm

… thus making a profit, and the brokers earning

their commission.
 “OTHER SIMILAR OPERATIONS”

 Circulating information that prices will or are

likely to rise or fall because of market
operations

 Making false or misleading statement

regarding a registered security

 Engaging a series of transaction inorder to

peg, fix, or stabilize prices
ILLUSTRATION: Manipulative and
Deceptive Devices

“SHORT SALE” – using or employing any

“stop-loss order” in connection with the
purchase of sale of any security registered
on an exchange, in contravention with SEC
rules and regulations.

“Stop-loss order” or “stop-market order” – to

buy when price reaches a particular point
 “OTHER CONTRIVANCE”

Using or employing any manipulative or

deceptive device or contrivance.

HOWEVER, the use of “Arbitrage Transaction,”

which covers the purchase of shares in one
stock exchange and the sale thereof in another
stock exchange, is not prohibited.
“OPTION TRADING”

It shall be prohibited for any Exchange member

to endorse or guarantee the performance of
any:

 Put – an option or promise to sell

 Call – an option or promise to buy
 Straddle – and option to buy and sell

Danger posed – the person to whom option is

given can manipulate the market during the
option period.
INSIDER TRADING: (BAR)
 INSIDER TRADING:

It shall be unlawful for an “insider” to sell or

buy a security of the issuer if >> he knows a
fact of special significance with respect to the
issuer or the security that it is not generally
available to the public. Unless:

 (a) The information was not gained from

such relationship; and

 (b) The insider proves that the fact is

generally available
Who is an Insider:

1. Director or Officer – of, or a person controlling or

controlled by an Issuer

2. Any Person – whose relationship or former

relationship to the Issuer, gives him access to a fact
of special significance about the issuer or the
security that is not generally available;

3. Gov’t. Employee – who has access to such

information

4. Any person – who learns such fact from any of the

foregoing Insiders, knowing that he learns the
information from an Insider.
When is Information “Material Non-Public”

1. If not generally disclosed to the public, and

would likely affect the market price if
disseminated

2. If considered by a reasonable person

important under the circumstances in
determining his course of action whether to
buy, sell, or hold a security.
THE BW INSIDER TRADING STORY:
How BW Shares Surged 18,025% in
One Year

Pre-1998: Dante Tan contributed

campaign funds for friend Erap. Tan
formed a gaming company he called
BWGE.

1998: Erap won election.

1999: Tan acquired tourism and

leisure company BW Resources. BW
then acquired wholly BWGE.
PAGCOR granted gambling
licenses to Tan’s companies
(easily, because of his close ties
to Erap.

BWGE granted exclusive contract

to operate national online Bingo
and ‘Quick-Pick-2,’ a Jueteng-like
gambling game

PAGCOR head told Congress that

BW bagged the contract because
Erap endorsed it
PAGCOR granted gambling licenses to Tan’s
companies (easily, because of his close ties
to Erap.

BWGE granted exclusive contract to operate

national online Bingo and ‘Quick-Pick-2,’ a
Jueteng-like gambling game

1999:PAGCOR head told Congress that BW

bagged the contract because Erap endorsed
it.
Rumors floated that gambling mogul Stanley
Ho is coming to head BW

BW stocks surged 18,000% although stock

market was at its bearish trend following the
1997 Financial Crisis (from P0.80–P145/share
and became PH’s most traded stock

Ho visited PH as Church launched massive

opposition to the plan.
Tan’s manipulations:

Tan sold his shares at discounted rates and

reported these transactions to the PSE as
twice the amount actually paid.

This created an impression that the stock

was being traded actively.
It was also found out that the daily turnover
of the BW Resources stock circulated among
10 brokerage firms only.

In addition, the PSE accused BW Resources

of engaging in “wash sales” or a sale
transaction wherein the buyer and seller of
the stock is the same.

Tan was charged. Erap fell.

The plan eventually failed to materialize

BW prices plunged below P30, weeks later

dipped to P1.00, causing heavy losses to
investors

PSE investigated, found Tan and his cohorts

to have committed stock price manipulations
 THE “JOSE VELARDE
ACCOUNT”
“Aided by insider trading, the sale of
Belle Corporation shares gave Estrada
P189.7 million in kickbacks. After the
sale was consummated, Ocier issued
International Exchange Bank Check No.
6000159271, drawn against the account
of Eastern Securities Development
Corporation, as Estrada's payoff. Ocier
"handed [the check] over to Dichaves
who, in turn[,] deposited it to the 'JOSE
VELARDE' account."111 "This claim ...
was confirmed by ... Mark Jimenez in his
March 6, 2001 Affidavit.“

• -- Dichavez vs. Ombudsman, GR. No.

206310-11
Other Areas of Protection:

1. Tender Offers
2. Proxy Solicitations
3. Disclosure Rule
 TENDER OFFER:

 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 (Sec.
19.1.8, SEC Rules)
Who is required to make Mandatory Tender
Offer (MTO):

Any person or group of persons acting in

concert, who intends to acquire:

 At least 15% of; or

 At least 30% over a period of 12 months

of any class of securities in a listed corporation

or a corporation with assets of at least P50-M
and having 200 or more stockholders with at
least 100 shares each.
 SEC Rules on Tender Offer:

See however Rule 9 of SEC Rules for

amendments, updates, and complete
guidelines on Tender Offer, including
exemptions and buy-backs:

Click to read the Rule Here

How Tender Offer made:

1. BY FILING – with SEC a declaration to acquire

such securities, and paying the filing fee;

2. BY FURNISHING – the Issuer a statement

containing the information required of the
issuer as SEC may prescribe; and

3. BY PUBLISHING – all requests or invitations

for tender, or materials making a tender or
requesting or inviting letters of such security.
Prohibited Acts in Tender Offers:

1. Making Untrue Statement – of a material

fact or omit to state any material fact
necessary inorder to make the
statement made not misleading.

2. Engaging in Fraudulent, deceptive, or

manipulative acts or practices;
 PROXY SOLICITATION:

Proxy solicitation refers to a request that

a corporate shareholder authorize another
person to cast the share holder’s vote at a
corporate meeting.

In corporate settings a proxy solicitation

is usually accompanied by a proxy
statement.
Regulating Proxy Solicitation:

Proxies must be issued, and

Proxy solicitation must be made in

accordance with rules and regulations to
be issued by the Commission (Sec. 20,
Rule 20, SEC Rules)
What “Solicitation” covers:

a. Any request for a proxy or authorization;

b. Any request to execute or not to execute, or

to revoke, a proxy or authorization; or

c. The furnishing of a form of proxy or other

communication to security holders under a
circumstance reasonably calculated to
result in the procurement, withholding or
revocation of a proxy.

[SEC vs. CA, G.R. No. 187702, 22 Oct. 2014]

Penalty for Violation of the Provisions
of RA No. 8799:
Penalty for Violation of Any Provision:

FINE of not less than P50,000.00 nor more

than P5,000,000.00), or

IMPRISONMENT of not less than 7 years nor

more than 21 years, or

BOTH, in the discretion of the court.

Penalty for Juridical Entities and Officers:

If the offender is a corporation, partnership or

association or other juridical entity, the penalty
may in the discretion of the court be imposed
upon such juridical entity and upon the officer
or officers of the corporation, partnership,
association or entity responsible for the
violation, and

if such officer is an alien, he shall in addition to

the penalties prescribed, be deported without
further proceedings after service of sentence.
Penalty for Juridical Entities and Officers:

If the offender is a corporation, partnership or

association or other juridical entity, the penalty may in
the discretion of the court be imposed upon such
juridical entity and upon the officer or officers of the
corporation, partnership, association or entity
responsible for the violation, and

if such officer is an alien, he shall in addition to the

penalties prescribed, be deported without further
proceedings after service of sentence.
 THAT’S, IT FOLKS.
THANKS.

References:

Villanueva, Commercial Law Reviewer, 2007 Ed.

Sundiang and Aquino, Commercial Laws
The Supreme Court of the Phils. Website
The World Wide Web

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