SECURITIES REGULATIONS CODE PURPOSE: The Securities Regulations Code or RA No. 8799 aims to protect the investing public primarily through a system of disclosure and provide punishment for fraudulent practices. THE SECURITIES AND EXCHANGE COMMISSION: Composition and Term: the SEC is composed of a Chairman and seven Commissioners who are given a 7-year term and has security of tenure to protect them from political influence. Transfer of Jurisdiction: the following formerly under the jurisdiction of the SEC has been transferred to Special Commercial Courts: 1. Fraudulent devices or schemes employed by the directors, business associates, officers or partners against the public and the stockholders, partners, members of associations or organizations registered with SEC. 2. Intra-corporate and intra-partnership controversies; and controversies between the corporation, partnership, or association, on one hand, and the state, on the other, insofar as it concerns their individual franchise or right to exist as such entity. 3. Controversies in the election or appointment of directors, trustees, officers or managers of such entities. 4. Petitions of such entities to be declared in a state of suspension of payments in cases where the it is illiquid, or where it is insolvent but is under the management of a rehabilitation receiver or management committee. SECURITIES 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. (Section 3.1) The main feature of a security is that a person purchases or acquires the same in the expectation of obtaining passive income or asset appreciation, that is income or gain obtained through the effort of another person. This feature makes them attractive and desirable and necessitates the protection of the investing public. They include: 1. Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities; 2. Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of deposit for a future subscription; 3. Fractional undivided interests in oil, gas or other mineral rights; 4. Derivatives like option and warrants; 5. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments 6. Proprietary or nonproprietary membership certificates in corporations; and 7. Other instruments as may in the future be determined by the Commission. Investment contract is a contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. Requisites: 1. 2. 3. 4. An investment of money; In a common enterprise; With expectation of profits; Primarily from the efforts of others (this modifies the Howey Test which requires profits to be derived “solely” from the efforts of others) ILLUSTRATION: Power Homes Unlimited Corp. (PHUC) requires an investor to pay $234 to become a Business Center Owner (BCO), which entitles him to recruit two person who should pay $234 each and out of which he shall receive a commission of $92. In case the two referrals/enrollees would recruit a minimum of four (4) persons each recruiting two (2) persons who become his/her own down lines, the BCO will receive a total amount of US$147.20, and so on. Here, the BCO is considered as an investment contract because the investor would be earning primarily from the efforts of his recruits and their recruits, as the pyramid goes on. REGISTRATION AND REPORTORIAL REQUIREMENTS REGISTRATION: The Securities Regulations Code (SRC) provides that securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the SEC (Commission). Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser. The Commission may audit the financial statements, assets and other information of 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. Procedure: 1. 2. 3. 4. Filing of SWORN REGISTRATION STATEMENT containing the information as the SEC may by rule require. a. Signatories to registration statement: Executive officer, principal operating officer, principal financial officer, comptroller, principal accounting officer, corporate secretary. b. Written consent of the expert named as having certified any part of the registration statement, whenever necessary. c. Where the registration statement includes shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders shall also be filed. PAYMENT of the filing fees which shall not exceed 1/10 of 1% of the aggregate price at which such securities are proposed to be offered. PUBLICATION of notice of the filing of the registration statement in two newspapers of general circulation once for two consecutive weeks. Within 45 days after the date of filing, or by such later date to which the issuer has consented, the SEC shall give an ORDER declaring the registration statement effective or rejecting it. 5. PROSPECTUS under oath that all requirements satisfied and all statements in registration statement and in such prospectus are correct. SECURITIES exempt from registration: 1. 2. 3. 4. 5. 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. 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 SEC may require compliance with the form and content for disclosures the SEC may prescribe. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. 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 Rule Regulatory Board, or the Bureau of Internal Revenue. Any security issued by a bank except its own shares of stock. TRANSACTIONS exempt from registration: 1. 2. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of SRC, to liquidate a bonafide debt, a security pledged in good faith as security for such debt. 3. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transaction 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. 4. The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. 5. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. 6. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. 7. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under the SRC or was, when sold, exempt from the provision of the SRC, 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 the SRC. Upon such conversion the 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. 8. Broker’s transaction, executed upon customer’s orders, on any registered Exchange or other trading market. 9. Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stocks 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 subscription 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 increase. 10. The exchange of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. 11. The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. 12. The sale of securities to any number of the following qualified buyers: a. Bank; b. Registered investment house; c. Insurance company; d. Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in trust functions; e. Investment company or f. Such other person as the SEC may rule by 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 The SEC may exempt other transactions where not necessary in public interest or for protection of investors such as small amount or limited character of public offering. However, an exemption fee of 1/10 of 1% of the maximum aggregate price or issued value of the securities should be paid. REPORTORIAL REQUIREMENTS: 1. 2. Annual report composed of a Balance Sheet, Profit and Loss Statement, and a Statement of Cash Flows certified by a CPA and a management discussion and analysis of results of operation Other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the SEC may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer. These reportorial requirements shall apply to an issuer: 1. Which has sold a class of its securities pursuant to a registration 2. With a class of securities listed for trading in an Exchange 3. With assets of at least Fifty million pesos (50,000,000.00) or such other amount as the SEC shall prescribe, and having two hundred (200) or more holders each holding at least one hundred (100) share of a class of its equity securities: Provided, however, That the obligation of such issuer to file report shall be terminate ninety (90) days after notification to the SEC by the issuer that the number of its holders holding at least one hundred (100) share reduced to less than one hundred (100) The issuer shall likewise furnish to each holder of such equity security an annual report in such form and containing such information as the SEC shall prescribe. PROTECTION OF THE PUBLIC: The Securities Regulations Code protects the public as follows: 1. 2. 3. 4. 5. Requiring full disclosure of information to the public regarding the securities that are being offered and the issuers, including the filing and approval of the registration statement and the approval of the prospectus; The requirement of regularly submitting material information to the SEC; Close monitoring of the securities and other circumstances that may affect the same as well as the persons involved including brokers, issuers, the exchange itself, etc. in order to ensure compliance with pertinent laws and regulations; Prohibiting and penalizing different fraudulent practices and transactions; and Providing the SEC the powers and functions. TENDER OFFER A tender offer is an offer by a person or group of persons to the stockholders of a corporation to tender their shares for purchase. Purpose: The rule on mandatory tender offer seeks to protect minority shareholders and provide them with a fair price for their share whenever a person or group of persons intends to buy a sizable number of shares in the company. Mandatory Tender Offer: applies to any person who intends to acquire at least 35% over a period of 12 months (previously 30, increased by the SEC pursuant to Section 72.1 of the SRC) of any class of any equity security of a: 1. Listed corporations; or 2. Corporations with: a. Assets of at least P50M and b. Having at least 200 shareholders who each have at least 100 shares The rule shall likewise apply even if the acquisition is less than 35% but will result in ownership of over 51% of the total outstanding equity securities of the public company. The offeror would be required to accept any and all securities thus tendered. Note that the percentage requirements likewise applies even in indirect acquisitions. ILLUSTRATION: U Corporation, a corporation listed in the PSE, has two principal stockholder-corporations, X Corporation which owns 60% and ABC Corporation which owns 17%. In turn, the principal stockholders of X Corporation are: XA (21%); XB (30%) and ABC Corporation (9%). XA and XB agreed to sell their shares to ABC Corporation. In this case, the mandatory tender offer rule applies to ABC Corporation. 1. ABC Corporation will own 60% of X Corporation (21% + 30% + 9%); 2. X Corporation likewise owns 60% of U Corporation, resulting in 36% (60% * 60%) indirect ownership; 3. Accordingly, they will own a total of 53% of U Corporation (36% indirect ownership + 17% direct ownership). As such, ABC Corporation is required to make a tender offer to the stockholders of U Corporation. Transactions EXEMPT from the Mandatory Tender Offer Requirement: 1. 2. 3. 4. 5. 6. 7. Any purchase of shares from the unissued capital stock provided that the acquisition will not result to a 50% or more ownership of shares by the purchaser; Any purchase of shares from an increase in authorized capital stock. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where the acquisition is made by the debtor or creditor. Purchases in connection with privatization undertaken by the government of the Philippines. Purchases in connection with corporate rehabilitation under court supervision. Purchases through an open market at the prevailing market price Merger or consolidation. Process: 1. 2. 3. The offeror will make an announcement of his intention in a newspaper of general circulation, prior to the commencement of the offer; At least 2 business days prior to the date of the commencement of the tender offer: a. File SEC Form 19-1 with the SEC including all exhibits thereto and pay the prescribed filing fees b. Hand deliver a copy of such form including all exhibits to the target company at its principal executive office and to each Exchange where such class of the target company’s securities are listed for trading. Report the results of the tender offer by filing with the Commission, not later than ten (10) calendar days after the termination of the tender offer, copies of the final amendments to the form. FRAUDULENT TRANSACTIONS AND OTHER MARKET MANIPULATIONS 1. Wash sale – any transaction in a security which involves no change in the beneficial ownership. A series of buy and sale transaction may be placed by one and the same beneficial owner in the exchange which would not affect any change of ownership of the shares transacted. 2. Matched Order – refers to an order or orders for the purchase or sale of security with the knowledge that a simultaneous order or orders of substantially the same size, time and price for the sale or purchase of such security has, or wil be entered by or for the same or different parties. Wash Sale and Matched Orders are not in themselves illegal. But they are considered fraudulent whenever they are resorted to in order to create a false or misleading appearance of active trading. 3. Marking the close – placing of purchase or sale order, at or near the close of the trading period in order to affect the closing price likewise affecting the opening price the following day. 4. Painting the tape – akin to marking the close but the activity is made during normal trading hours which involves buying activity among nominee accounts at increasingly higher or lower prices or causing fictitious reports to appear on the ticker tape. 5. Squeezing the float – part or portion of the issue/security which is outstanding but intentionally held by dealers or other person with a view of reselling them later for profit. Thereby affecting supply of the security or its availability while demand remains the same or increases, driving the prices up. 6. Hype and Dump – involves the following steps: a. Purchase of outstanding capital stock of a dormant public shell company for a nominal amount; b. Merger of the shell company with the privately held company of the person or group of persons involved to gain control of the majority of the stocks of the merged entity; c. Reverse-split of the shares d. Reissuance of the shares certificates in the name of the merged entity to relatives and associates; e. Hiring a broker-dealer who would market the stocks of the newly merged entity; f. Hiring a promoter to “hype” the virtues of the company; g. When the market reaches the high price, they would “dump” their shareholdings and bail out. 7. Boiler Room Operations – involves an intensive selling campaign through numerous salesmen by telephone or through direct mail offerings for securities of either a certain type or from a specific issuer. Investors are induced to purchase through hard-sell techniques based on unfounded predictions and mailing of misleading market letters. All 5 above (3 to 7) become illegal/unlawful if its effected to: a. Raise the price or induce the purchase of a security or of a controlling, controlled or commonly controlled company by others; b. Depresses their price to induce the sale of a security, whether of the same or of a different class, of the same issuer or of a controlling, controlled company, or commonly controlled company by others; and c. Creates active trading to induce such purchase or sale through said devices or schemes. 8. Circulating or Disseminating Information On Share Price Movement – involves people providing information that the price of any security listed in the exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security and thus inducing the purchase or sale of such security. 9. Making False or Misleading Statements – with respect to any material fact, which he knew or had some reasonable grounds to believe was so false or misleading for the purpose of inducing the purchase or sale of any security. 10. Pegging or Fixing or Stabilizing the price of security effected either alone or with others through any series of transactions for the purchase or sale thereof, if done for such purpose. 11. Short Sale – selling the security which the vendor does not own and borrowed only from another. This is not illegal per se but only regulated. INSIDER TRADING Material Non-Public Information: Information that will affect the price of the security or would influence a person in deciding whether to buy, sell, or hold a security which is not available to the public. Insider: 1. 2. 3. 4. 5. The issuer. A director or officer of the issuer or a person controlling the issuer. A person whose relationship or former relationship to the issuer gives or gave him access to material non-public information. A government employee, or director, or officer of an exchange, clearing agency, and/or self-regulatory organization who has access to material nonpublic information. A person who learns such information by a communication from any of the foregoing insiders. Insider Trading: when an insider in possession of material non-public information buys or sells a security. Exceptions: a person in possession of material non-public information can buy or sell securities: 1. 2. When he can prove that the information was not gained from an insider; If the other party is identified and that he: a. Disclosed the information; or b. Had reason to believe that the other party is also in possession of the information. Presumption: a purchase or sale of a security of the issuer made by an insider or such insider’s spouse or relatives by affinity or consanguinity within the 2nd degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted: 1. After such information came into existence; 2. But prior to the dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information. ILLUSTRATION: Gas Gas Corporation, a publicly listed company, discovered a rich deposit of natural gas. This information was not made public in order to acquire the lands in the surrounding area at cheap prices. Prior to the disclosure of the information to the SEC, the directors and officers of the company bought shares of the Corporation. The prices of such shares went up once the discovery was made public. In this instance, the directors and officers, being such are considered insiders and are informed of the discovery, which is a material information which would affect the share price of the corporation. Since they traded (bought) the shares of the company prior to the disclosure of the information, they are liable for insider trading. ILLUSTRATION 2: Assuming, employees of a printing company who handles the printing work of Gas Gas Corporation came into contact with the exploration reports which were sent to their department by mistake together with the materials intended to be printed, and such employees bought shares of the company at low prices and later sold them at huge profits. In this instance, the employees cannot be considered insiders since they acquired the information not because of any fiduciary relationship that they with Gas Gas Corporation. Likewise, they obtained the information not by “a communication” but because of error. Note: this rule will not apply if the information is relative to a tender offer, because it is unlawful for any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer. Liability for disclosure: It shall be unlawful for any insider to communicate material nonpublic information about the issuer or the security to any person who, by virtue of the communication, becomes an insider, where the insider communicating the information knows or has reason to believe that such person will likely buy or sell a security of the issuer whole in possession of such information. This is regardless of whether the one to whom the communication was given actually traded on the securities. INSIDER TRADING WHERE INFORMATION RELATES TO A TENDER OFFER: if the information is relative to a tender offer, it is unlawful for any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer.