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Registration of securities

By Gladys Jane Dela Cruz September 8, 2022

SECTION 8.1 of Republic Act 8799, or the “Securities and Regulation Code (SRC)” clearly states that securities should not be sold or offered for sale or distribution in the Philippines without a registration statement duly filed with and approved by the Securities and Exchange Commission (SEC).

Prior to such sale, information on the securities should also be made available to each prospective buyer. The purpose of this provision is to afford the public protection from investing in worthless securities, the Supreme Court explained in Herbosa v. CJH Development Corp., GR 210316, Nov. 28, 2016.

Section 28 of the SRC further provides that no person can engage in the business of buying or selling securities in the Philippines as a broker or dealer unless registered as such with the SEC.

In Gabionza v. Court of Appeals (GR 161057, Sept. 12, 2008), the Supreme Court stated that the term “securities” is a flexible rather than static principle. It is one that is capable of adaptation to meet the countless and variable schemes devised by those who seek to use the money of others on the promise of profits.

Section 3.1 of the SRC defines the word “securities” as shares, participation or interest in a commercial enterprise or profit-making ventures that are evidenced by a certificate, contract or instrument, whether written or electronic in character. They can be in the form of shares of stocks, bonds, notes, investment contracts and derivatives, among others.

One of the most common offers in the market is an investment contract. In SEC v. (GR 164197, Jan. 25, 2012), the Supreme Court pointed out that the SRC treats investment contracts as “securities” that must be registered with the SEC before being distributed and sold.

The Supreme Court employed the so-called Howey Test, named after the landmark 1946 United States case of SEC v. W.J. Howey Co., which held that the following must concur for an investment contract to exist:

– There must be a contract, transaction or scheme;

– There must be an investment of money;

– The investment is in a common enterprise;

– There must be an expectation of profits; and

– Such profits must arise primarily from the efforts of others.

These elements were adopted by the implementing rules and regulations of the SRC as the definition of an investment contract.

In a July 5, 2022 order, the SEC revoked the certificate of incorporation of Wellcons Unlimited Systems Inc. Through social media, Wellcons had enticed the public to invest in a pyramiding/Ponzi scheme where the package chosen by an individual promised token products and various referral and sales match bonuses with a double-your-money program within a six-month period.

In another order dated July 29, 2022, the SEC revoked the certificate of partnership of Katuwang Poultry Chicken Egg Producing Co., a registered partnership with the primary business purpose of producing chicken eggs, when it made investment solicitations on its Facebook account with a promise of potential profits ranging from 48 to 120 percent in only six months. It appeared that the bigger the initial investment or capital given, the bigger the profit would be.

In both cases, SEC investigations found that Wellcons and Katuwang Poultry did not have the requisite secondary license to engage in such investment solicitations and that the investment contracts were not registered with the SEC. Applying the Howey Test, the SEC determined that the schemes took the form of an investment contract:

– The companies had offered the schemes to the public;

– The companies received money from the public;

– The companies pooled the money invested in a profit-making venture;

– The investors were promised guaranteed returns or passive income; and lastly,

– The investors were not required to do anything but to wait for the profits after the end of a specified period.

Section 73 of the SRC provides that, in case of violations, offenders be subjected to a fine or imprisonment or both. With regard to Wellcons and Katuwang Poultry, the SEC invoked its power under Section 6(i)(2) of Presidential Decree 902-A and Section 5.1(m) of the SRC to revoke their registration certificates on the ground of serious misrepresentation resulting in great prejudice or damage to the general public.

It is worth noting that the illegal activities of Wellcons and Katuwang Poultry were uncovered through inquiries of ordinary citizens with the SEC. This serves as a reminder to the investing public to remain vigilant against fraudulent schemes and to check whether investment contracts are duly registered with the SEC.

Gladys Jane M. de la Cruz is an associate of Mata-Perez, Tamayo and Francisco.

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