Securities Regulation Code (“SRC”)

Republic Act No. 8799

I. Declaration of Policy.

The State shall:

1. establish a socially conscious, free market that regulates itself;
2. encourage the widest participation of ownership in enterprises;
3. enhance the democratization of wealth;
4. promote the development of the capital market, protect investors;
5. ensure full and fair disclosure about securities; and
6. minimize if not totally eliminate insider trading and other fraudulent or
manipulative devices and practices which create distortions in the free
market.1

II. Securities.

A. 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, instrument, whether written or electronic in character. It includes:

1. Shares of stock, bonds, debentures, notes, evidences of indebtedness,

asset-backed securities;
2. Investment contracts, certificates of interest or participation in a profit
sharing agreement, certificates 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.2

B. Investment Contract.

An investment contract means a 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. An investment contract
is presumed to exist whenever a person seeks to use the money or property of
others on the promise of profits.3

To be a security subject to regulation by the SEC, an investment contract in our

jurisdiction must be proved to be: (1) an investment of money, (2) in a common
enterprise, (3) with expectation of profits, (4) primarily from efforts of others.4
This test is more commonly known as the “Howey Test”.

1. Investment in Money.

1
Section 2, SRC.
2
Section 3, SRC.
3
Section 26.3, 2015 Implementing Rules and Regulations (“IRR”) of SRC.
4
Power Homes Unlimited Corp. v. Securities and Exchange Commission, G.R. No. 164182, 26
February 2008.

© 2018 Lean Jeff M. Magsombol. All rights reserved. pg. 1

 A "payment of money" does not satisfy the first element of the Howey Test,
whereas an "investment in money" does. An "investment in money" carries
with it a possibility of a gain or loss, but the purchase of a product or service
is simply a sales transaction with no expectation of gain and no possibility
of loss.5

2. Common Enterprise.

A common enterprise is deemed created when two (2) or more investors

"pool" their resources, creating a common enterprise, even if the promoter
receives nothing more than a broker's commission.6

3. Expectation of Profits.

Profits means either capital appreciation resulting from the development of

the initial investment, or participation in earnings resulting from the use of
investors' funds.7

4. Primarily from Efforts of Others.

It is enough that the expectation of profits be derived primarily, not solely,

from the efforts of others.

The application of Howey Test can be seen in the case of Securities and Exchange
Commission v. CJH Development Corporation8. In the said case, CJH
Development Corporation (“CJHDC”) and CJH Suites Corporation (“CJHSC”),
and a buyer of their residential unit enters into a Sale with accompanying
Leaseback Agreements. After payment of the purchase price for the residential
unit, the buyer cedes control and management over the same to CJHDC and
CJHSC who manages the said units together with all the other units under
leaseback agreements. Despite the non-participation of the buyers in the
management of his units, they derive profits therein in the form of share in the
annual rental income from CJHDC's and CJHSC's hotel operations. Hence, it was
ruled that the agreement of the buyer with CJHDC and CJHSC is an investment
contract.

III. Registration of Securities.

A. Requirement of Registration of Securities.

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.9

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.10

5
In the Matter of Hyper Program International Direct Sales and Trading Corporation and HPI
Direct Sales and Trading Corporation, SEC CDO Case No. 06-15-020, 05 November 2015.
6
Section 26.3, IRR of SRC.
7
In the Matter of Jacama Sales and Marketing and Janus Carlo D. Manalang, SEC CDO Case
No. 03-16-030 (Cease and Desist Order), 05 April 2016.
8
G.R. No. 210316, 28 November 2016.
9
Section 8.1, SRC.
10
Section 8.5, SRC.

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 B. Prospectus Delivery Requirements.

A prospectus is a document that provides details about an investment offering

for sale to the public. It is to the submitted to the Commission as part of the
registration statement11.

Securities required to be registered shall not be offered for sale or sold unless the
prospectus, or any information material which has been filed with the
registration statement, has been widely disseminated and sufficient copies have
been made available to interested parties. Further, the prospectus shall contain
the following statement:

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.12

The prospectus shall not be used unless all the information it contains are up to
date and accurately reflect the terms of the offering and the financial condition
of the Issuer.13

C. Exempt Securities.

The requirement of registration shall not as a general rule apply to any of the
following classes of securities:

1. 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.
2. 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.
3. Certificates issued by a receiver or by a trustee in bankruptcy duly
approved by the proper adjudicatory body.
4. 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.
5. Any security issued by a bank except its own shares of stock.

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

11
Section 8.1.3, IRR of SRC.
12
Id.
13
Id.

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 respect to such securities is not necessary in the public interest and for the
protection of investors.14

D. Exempt Transactions.

The requirement of registration shall likewise not apply to the sale of any security
in any of the following transactions:

1. At any judicial sale, or sale by an executor, administrator, guardian or

receiver or trustee in insolvency or bankruptcy.

2. 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
the SRC, to liquidate a bona fide 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, 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.

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, where 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
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 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 transactions, executed upon customer's orders, on any

registered Exchange or other trading market.

9. Subscriptions for shares of the capital stock of a corporation prior to the

incorporation thereof or in pursuance of an increase in its authorized

14
Section 9, SRC.

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 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.

10. 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.

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 managed 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 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.

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.

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.15

E. Rejection and Revocation of Registration of Securities.

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:

1. The issuer:

a. Has been judicially declared insolvent;

b. 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 the registration statement has been filed;

15
Section 10. SRC.

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 c. Has been or is engaged or is about to engage in fraudulent
transactions;
d. Has made any false or misleading representation of material facts
in any prospectus concerning the issuer or its securities;
e. 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

2. 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

3. 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.16

IV. Protection of Shareholders’ Interests.

A. Tender Offer.

A tender offer is an offer by the acquiring person to stockholders of a public

company for them to tender their shares therein on the terms specified in the
offer. Tender offer is in place to protect minority shareholders against any
scheme that dilutes the share value of their investments. It gives the minority
shareholders the chance to exit the company under reasonable terms, giving
them the opportunity to sell their shares at the same price as those of the
majority shareholders.17

"Tender offer" means a publicly announced intention by a person acting alone or

in concert with other persons to acquire outstanding equity securities of a public
company, or outstanding equity securities of an associate or related company of
such public company which controls the said public company.18

Public company means any corporation (1) with a class of equity securities listed
on an Exchange, or (2) with assets in excess of Fifty Million Pesos
(PhP50,000,000.00) and has two hundred (200) or more holders each holding at
least one hundred (100) shares of a class of its equity securities.19

1. Mandatory Tender Offers.

a. Any person or group of persons acting in concert, who intends to

acquire fifteen percent (15%) of equity securities in a public company in

16
Section 13, SRC.
17
Cemco Holdings, Inc. v. National Life Insurance Co. of the Philippines, Inc., G.R. No.
171815, 7 August 2007.
18
Section 19.1.8, IRR of SRC.
19
Section 3.1.16, IRR of SRC.

© 2018 Lean Jeff M. Magsombol. All rights reserved. pg. 6

 one or more transactions within a period of twelve (12) months, shall
file a declaration to that effect with the Commission.20

b. 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.21

Control is the power to determine the financial and operating policies

of an entity in order to benefit from its activities. It is presumed to exist
when the parent entity owns, directly or through subsidiaries and/or
associates, more than fifty percent (50%) of the voting power of an
entity. It also exists when the parent entity owns fifty percent (50%) or
less of the voting power of an entity, but has any of the following powers:

i. Over more than fifty percent (50%) of the voting rights by virtue
of an agreement with other investors;
ii. To govern the financial and operating policies of the entity under
a statute or agreement;
iii. To appoint or remove the majority of the members of the board
of directors or equivalent governing body; or
iv. To cast the majority of votes at meetings of the board of directors
or equivalent governing body.22

c. If any acquisition that would result in ownership of over fifty percent

(50%) of the total outstanding equity securities of a public company, the
acquirer shall be required to make a tender offer for all the outstanding
equity securities to all remaining stockholders of the said company at a
price supported by a fairness opinion provided by an independent
financial advisor or equivalent third party. The acquirer in such a tender
offer shall be required to accept all securities tendered. 23

2. Exemption from Mandatory Tender Offer Requirement.

Unless the acquisition of equity securities is intended to circumvent or

defeat the objectives of the tender offer rules, the mandatory tender offer
requirement shall not apply to the following:

a. Any purchase of securities from the unissued capital stock; Provided,

the acquisition will not result to a fifty percent (50%) or more ownership
of securities by the purchaser or such percentage that is sufficient to
gain control of the board;
b. Any purchase of securities from an increase in authorized capital stock;
c. Purchase in connection with foreclosure proceedings involving a duly
constituted pledge or security arrangement where the acquisition is
made by the debtor or creditor;
d. Purchases in connection with a privatization undertaken by the
government of the Philippines;
e. Purchases in connection with corporate rehabilitation under court
supervision;
f. Purchases in the open market at the prevailing market price; and

20
Section 19.2, IRR of SRC.
21
Section 19.2, IRR of SRC.
22
Section 3.1.8, IRR of SRC.
23
Section 19.2, IRR of SRC.

© 2018 Lean Jeff M. Magsombol. All rights reserved. pg. 7

 g. Merger or consolidation.24

3. Disclosure Requirements in Tender Offers.

The Offeror shall publish, send or give to security holders a report containing
the following information:

a. The identity of the Offeror including his or its present principal

occupation or business;

b. The identity of the target company;

c. The amount of class of securities being sought and the type and amount
of consideration being offered;

d. The scheduled expiration date of the tender offer, whether the tender
offer may be extended and, if so, the procedures for extension of the
tender offer;

e. The exact dates when security holders who deposit their securities shall
have the right to withdraw their securities and the manner by which
shares will be accepted for payment and which withdrawal may be
effected;

f. If the tender offer is for less than all of the securities of the class and the
Offeror is not obligated to purchase all securities tendered, the exact
date of the period during which securities will be accepted on a pro rata
basis and the present intention or plan of the Offeror with respect to
the tender offer in the event of an oversubscription by security holders;

g. The confirmation by the Offeror's financial adviser or another

appropriate third party that the resources available to the Offeror are
sufficient to satisfy full acceptance of the offer; and

h. The information required in SEC Form 19-1.25

B. Proxy Solicitations.

Written authorization from an absent member (or a shareholder, called the

'principal') that confers a limited power of attorney on another person, member,
or management of the firm (called 'agent' or 'proxy') to vote on behalf of, and in
accordance with the directions of, the principal.26

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

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

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.

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.

24
Section 19.3, IRR of SRC.
25
Section 19.7, IRR of SRC.
26
http://www.businessdictionary.com/definition/proxy.html

© 2018 Lean Jeff M. Magsombol. All rights reserved. pg. 8