YASAY NOTES – SECURITIES LAW

Security is an interest in a commercial enterprise or profit-making venture evidenced by an

instrument, whether written or electronic in character.

Feature of a security:
A security promises passive income and capital appreciation
- because of this feature, the public must be protected

Examples of securities:
1. Shares of stocks, bonds, notes, asset-back securities
2. Investment contracts
3. Fractional undivided interest in oil, gas or other mineral rights

What is an investment contract?

Howey Test:
- A contract involving the investment of money
- In a common enterprise
- Where a person is led to expect profits
- ‘SOLELY’ from the efforts of another (but SEC redefined it as PRIMARILY)

No person can offer for sale a security unless the security has been registered, regardless of
whether or not it earns profit.
- It must be registered because of its attractiveness to the public and their implication for
fraud and deception.

“Self-improvement contracts” considered as securities if they partake of an investment contract.

(US jurisprudence)
- When the undeniable efforts to earn profits are done by others, the buyer of self-
improvement contracts would still not exert effort.
- The buyers would only exert a modicum of effort.
- So … efforts need not come solely from other persons. It just needs to come PRIMARILY
from them.

Investment Contract as defined in SEC Implementing Rules – a contract, transaction, or scheme

whereby a person invests his money in a common enterprise and is led to expect primarily from the
efforts of others.

FIVE ELEMENTS OF AN INVESTMENT CONTRACT:

1. contract, transaction, scheme
2. investment of money
3. common enterprise
4. expectation of profits
5. primarily from the efforts of others

Philippine jurisprudence has adopted the Howey Test.

With the looming liberalization of the legal services sector, SC is aware that lawyers must have
knowledge on Securities, Banking Laws, Intellectual Property, etc. in order to be globally
competitive.

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Basic types of securities:

1. Equity security
2. Debt security
3. Derivatives
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Multi-level marketing scheme where participants earn through down-line business, and there is
expectation of profits, the same is to be deemed as securities.
But: SEC v Prosperity.com (2012)
- Multi-level marketing scheme (where earnings are obtained through down-line referrals),
absent expectation of profits, is not securities.

Postdated checks promising a yield may fall under “evidence of indebtedness” in the SRC;
considered securities.

Time share contracts where there is a promise of capital appreciation are securities.
________________________

SECURITIZATION
- Process of converting or packaging assets or income streams into a single security
- The purpose is to MINIMIZE RISK since there are several assets or income streams in the
form of repayments and interest.

_______________________
Section 8.1. Securities cannot be sold or offered for sale in the PH without a registration statement
duly filed with and approved by the SEC.
- The security must be registered. Only from the moment of approval of registration
statement may an issuer offer the security for sale.
- PRIOR TO SUCH SALE, information on the securities, in the form and substance prescribed
by the SEC, shall be made available to each prospective purchaser. (Rule on disclosure)

Purpose: to protect the investing public by subjecting securities to DISCLOSURE AND

REPORTORIAL REQUIREMENTS. The SEC may even audit the financial statements of the firm
applying for registration of its securities.

Registration as a corporation is distinct and separate from registration of the securities of such
corporation.

CAVEAT EMPTOR: The SEC does not guarantee the soundness of registered securities. Registration
does not guarantee the soundness of the securities. Caveat emptor is still applies but the investor is
now better guided in making his decision due to the disclosure and reportorial requirements.
_______________________

SEC has the power to issue cease and desists orders, punish for contempt, issue subpoena duces
tecum and summon witnesses.

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SEC Jurisdiction over cases under Section 5 of P.D. 902-A transferred to the special commercial
courts (RTCs). Purpose is to relieve the SEC of quasi-judicial functions and allow it to
concentrate on its primary mandate of regulating and developing the securities market.

Keyword: FIRES (Jurisdiction from SEC to RTC)

F- Fraud (committed by directors, officers, trustees against the public)
I- Intra-corporate and Intra-partnership disputes
S & R- Petitions for SUSPENSION OF PAYMENTS (where the corporation is illiquid and under
rehabilition) PETITION FOR RECEIVERSHIP or management committee
E- election and appointment disputes involving directors, officers, trustees and managers of
corporations, partnerships and associations

INTRA-CORPORATE AND INTRA-PARTNERSHIP AND ELECTION DISPUTES:

Under Special Commercial Court’s jurisdiction

Which tribunal has jurisdiction over proxy-validation disputes?

Laws:
- PD 902-A Section 6 gives the SEC the power to pass upon the validity of the issuance and
use of proxies and voting trust agreements for absent stockholders or members.
- Proxies must be issued and proxy solicitations must be made in accordance with rules and
regulations to be issued by SEC.

Ruling:
- The special commercial courts. Issues on validity of proxies and on proxy solicitations re
elections of directors fall within the jurisdiction of Special Commercial Courts.

Ratio: If proxy-validation issues are with respect to the election of directors, officers, trustees and
managers of corporations, partnerships and associations, it is the RTC (SCC) which has jurisdiction.
It is an election dispute.
- PD 902-A Section 6 refers to Section 5. SRC transfers issues under Section 5 to SCC.
- Also, proxies which do not deal with election of directors, etc. (e.g. issue to be voted upon is
the increase in the authorized capital stock of the corporation, or corporation to incur
bonded-indebtedness), it is the SEC which has jurisdiction. But IF IT INVOLVES ISSUE ON
ELECTION OF DIRECTORS, etc. it is an ELECTION DISPUTE which is under the jurisdiction
of SCC.
However, SEC retains regulatory and investigatory powers over proxies if this refers not to an
election dispute of DOTM (directors, etc.)

Cemco Holding case:

In cases falling within its administrative jurisdiction, SEC may grant affirmative relief, i.e. order a
tender offer.
- SEC’s INI powers – Implied, Necessary, Incidental to carrying out of the express powers
granted to the Commission
- SEC may exercise such other powers as may be provided by law as well as those which may
are necessary or incidental to the carrying out of the express powers granted to the
Commission to achieve the objective and purposes of these laws.
SEC has the express power to investigate tender offer issues. Thus, such express power carries with
it the implied power to order a tender offer.

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SEC quasi-legislative power to add to the list of exempt securities:

Standards: not necessary for the public interest
For the protection of investors (NNPP)

_______________________

Two-step query to determine if registration is required

1. Is the security an exempt security?
2. If not, is the transaction in which the security will be sold or offered for sale an exempt
transaction?

Exempt Securities (BRIG)

1. Government-issued or guaranteed securities. Includes foreign government and local
government
2. Receiver or trustee in bankruptcy issued certificates
3. Insurance Commission, HLURB, and BIR-supervised and regulated securities
4. Bank securities (except the bank’s own shares)
a. Evidences of indebtedness issued by a quasi-bank are also exempt from registration

Exempt Transactions (PJ-LIES-CSB)

1. Automatic exemptions
a. Private placement – sale to less than 20 persons in a 12-month period
b. Judicial and insolvency sale
c. Liquidation of security by lien-holder
d. Isolated transaction by owner
e. Exclusive stockholders’ purchase
f. Stock-dividend
g. Conversion
h. Broker’s transactions
i. Subscription (pre-incorporation OR increase of authorized capital stock)
i. Issuance of shares out of previously authorized but unissued capital stock is
not considered as an automatic exception under the law since the exemption
only applies to issuance of shares as part of and in the process of increasing
the authorized capital stock. (Nestle PH Inc. case, 1991)
ii. Although it is not covered under the exemption for subscriptions, it may be
exempt for being a private placement (sale to less than 20 investors).
iii. It may also exempt if issued to existing stockholders sold in the exercise of
their preemptive right.

2. Exemptive relief
The SEC, in the exercise of its power to grant exemptive relief, may exempy other
transactions where NOT NECESSARY IN PUBLIC INTEREST OR FOR PROTECTION OF
INVESTORS (such as small amount or limited character of public offering)

Registration and Registration of Securities Professionals

- No person shall engage in the business of buying or selling securities in the Philippines as a
broker or dealer, or act as a salesman, or an associated person of any broker or dealer
(BADS) unless registered as such with the SEC.
o BROKER
o DEALER

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o ASSOCIATED PERSON
o SALESMAN
- An information provider who was instrumental in the sale of an investment product called
PERFORMANCE MANAGED PORTFOLIO is considered as a BROKER even if she did not sign
in the relevant documents. Not being registered as a broker with the SEC, she could be
charged with the violation of the SRC. (SEC v Santos, 2014)
- Someone is a broker when through the information he provides, he is able to facilitate the
consummation of the sale transaction of the securities.
- The mere fact that he did not sign the documents does not relieve him from being deemed a
broker.

Reportorial Requirements
- Reportorial requirements apply to LFS:
o Those who sold registered securities, or
o With listed shares (PH stock exchange), or
o Assets of at least P50M having 200 or more holders with at least 100 shares each
- Even though a corporation’s shares are available only to a limited class or sector, it must
still comply with the reportorial requirements because the SRC does not distinguish. (PNB
case)

Disclosure re beneficial ownership

- In case the corporation satisfies the requirements of LFS, ANY PERSON WHO ACQUIRES
THE BENEFICIAL OWNERSHIP OF >5% of equity shares shall submit a DISCLOSURE
STATEMENT to the issuer, the commission, and the exchange.
- The broker has to disclose to that he is holding the shares for the interest or for the benefit
of his principal.

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 by the offeror.
- It is a means of seizing control of the corporation.

MANDATORY TENDER OFFER RULE

- Requires the offeror to make a tender offer NOT JUST to those with sizeable stockholdings
BUT to ALL STOCKHOLDERS, including minority stockholders.
- In order to prevent the dilution of the value of the shares of minority SH.
- When applicable:
o Listed corporation
o Corporation with assets of at least P50M having 200 SH with 100 shares each
- A person or group of persons who intends to acquire at least 35% of the shares of such
corporation or who intends to acquire at least 35% of the shares over a period of 12 months
shall make a tender offer.
- MTO rule is still applicable even if the acquisition is less than 35% when the purchase
would result in ownership of more than 51% of the total outstanding equity securities of
the target.
- The MTO rule applies to both direct and indirect acquisition.
- Minority shareholders may compel the offeror to buy their shares.

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PROXY SOLICITATIONS
- No broker or dealer shall give any proxy 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.
- Broker must tell the issuer, the SEC, the PH Stock exchange, that it is holding proxy of more
than 5% for the benefit of the beneficial owner.

PROHIBITIONS ON FRAUD, MANIPULATION AND INSIDER TRADING

WASH SALE: Transactions involving no change in beneficial ownership.

The trading is done to make it appear like there is active trading. Purpose is to increase the value.

MARKING THE CLOSE: (Closing price is important because it is what public sees)
Here, shares are being sold with manipulation of its price at the time of closing.

HYPE AND DUMP: Hyping the stock through press releases or spreading of positive news about the
corporation to invite people to buy and so it can dump the shares to them.

SHORT SALE: Sale of a security that was borrowed by the seller. Three parties involved: seller,
buyer and securities lender. Why would you buy a security that you borrowed? Because: the short
seller anticipates that the price of the share will fall. “Sell high and buy low.” Short seller wants the
corporation to go down.
Step 1: Borrow shares from lender.
Step 2: Sell high to market.
Step 3: Share price falls.
Step 4: Buy low from market
Step 5: Return shares to repay the lender
(SHORT SALE IS NOT REALLY PROHIBITED, but regulated.)

OPTION
- An instrument which gives one the OPTION TO BUY (call) or SELL (put) a security. (BC-SP)
- If the option is “out of the money”, do not exercise the option. An option may also be not
exercised.
- If the value of the shares of an issuer are going down, there are two options:
o Short sale
o Purchase a put option (If value goes up, do not exercise. The loss will only be the
purchase price of a put option.)
- STRADDLE – the option to both buy and sell a security to another person at a pre-
determined price within a fixed period.

TRANSACTIONS OF DIRECTORS, OFFICERS OR STOCKHOLDERS (DOS)

- (1) Director, (2) Officers, (3) Stockholders who are beneficial owners of more than 10% of
the shares of a LFS corporation shall:
o file a report with SEC and PSE (if listed) indicating their ownership and the
monthly report re ownership and change of ownership in shares they are holding
in the corporation.
- Initial Report: acquisition of shares
- Monthly report: change of ownership

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- Purpose: To notify third persons; serve as signal for them re issuer status
SHORT SWING PROFIT
- Profit from selling (purchasing) a security obtained within a period of 6 months from the
purchase of the security
- Any short-swing profit obtained by a DOS from the sale/purchase of a corporation of which
he is a DOS shall inure to and be recoverable by the issuer. (RTC)
o DOS took advantage of his position.
o Jurisdiction: RTC
o Who may file?
 Issuer, or
 a HOLDER OF SECURITY in such issuer for and in behalf of the issuer, if the
issuer shall fail or refuse to bring the suit within 60 days after request or
shall fail diligently to prosecute the same thereafter (representative party)
 Prescriptive period: 2 years
 Purpose: to prevent the unfair use of information which may have been
obtained by such beneficial owner, director or officer by reason of his
relationship to the issuer.

INSIDER TRADING
- Trading (buying or selling) by an insider of a security while in a possession of MATERIAL,
NONPUBLIC INFORMATION (MNI) regarding the security or the issuer.
- Elements:
o There is a trading of securities
o Done by an insider
o While the insider has MNI
- Purpose: to prevent unfairness to the investing public since the insider is profiting from the
MNI not available to the public.
- Also, to encourage the public investment in the capital markets by providing for a level
playing field.
- MNI: Information about the SECURITY or the ISSUER not generally available to the public.
Information is material when:
o It will affect the PRICE of the security or
o Would influence a person in DECIDING whether to buy, sell, or hold a security

INSIDER: Who are they? (TRIGOD)

1. Issuer
2. Director or Officer
3. A person whose Relationship or FORMER relationship to the issuer gives or gave him access
to the MNI
4. A Gov employee, or Director or Officer (G-O-D) of an exchange, clearing agency and/or self-
regulatory organization (S-E-C) who has access to MNI
5. A person who learns MNI by a communication from any of the foregoing insiders (“Tipee”)
TIPPEE: MUST KNOW THAT THE TIPPER IS AN INSIDER

INSIDER cannot buy or sell a security while in a possession of the MNI, UNLESS:
- He proves that the MNI was not gained by virtue of being an insider or from an insider
- The counterparty is identified and the insider proves that he DISCLOSED THE
INFORMATION TO THE COUNTERPARTY or that he has good reason to believe that the
counterparty is in possession of the info.

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** Employees who had access to a MNI are not insiders if their RELATIONSHIP or FORMER
RELATIONSHIP do not involve a fiduciary or trust relationship such that confidence is not reposed
upon them.
** Neither are they “tipee” when they learned of the MNI by an inadvertent error.

An employee is not an insider under “A person whose Relationship or FORMER relationship to the
issuer gives or gave him access to the MNI” when he is not a fiduciary, such that no confidence was
reposed upon him.

If the “tipee” (a person who learns MNI by a communication from any of the foregoing insiders)
transfers the information to another person, that other person is not himself a “tipee”.

SPECIAL RULE RE TENDER OFFER

- If a person knows that a corporation is to be the subject of a tender offer, and such person
trade on such information, he violates the SRC even though he is not an insider. Liable for
breach and misuse of confidential and insider information
- Under the SRC, it shall be unlawful where a tender offer as commenced or is about to
commence for any person (other than the tender offeror) who is in possession of MNI
relating to such tender offer. The law does not require that the person trading the securities
of the corporation subject of a tender offer be an insider.

UNCERTIFICATED SECURITIES
- a security evidenced by ELECTRONIC or similar (e.g.) optical records
- (Fraud is easier in paper-based transactions)
- A corporation whose shares are registered with the SEC or listed with an exchange may
issue uncertificated securities, provided that the articles and by-laws of a corporation so
provides that it may and subject to the condition that the SHAREHOLDER MAY NOT
REQUIRE THE CORPORATION to issue a certificate in respect of any shares recorded in
their name (it will defeat the purpose of scriptless certificate).

TRANSFER OF SECURITIES
- Affects Sec. 63 of the Corporation Code which requires delivery + indorsement for share
transfer
- Transfer of securities, including uncertificated securities, may be validly made and
consummated by appropriate book-entries in the securities account or STB. No need for
physical delivery and transfer.

PLEDGE OF SECURITIES
- May be made if the securities intermediary indicates by BOOK-ENTRY that the security has
been credited to a specially designated PLEDGE ACCOUNT in favor of the pledgee.
(considered as delivery and endorsement)

** Transfer and pledge would be binding in the corporation if recorded in the corporate books

MARGIN AND CREDIT

- A person buys shares on credit. The amount he puts up is called as equity while the amount
he borrows is called as margin.
- Margin limits:
o 65% of the current market price of the security; or

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o 100% of the lowest market price of the security during the preceding 36 months
provided it is not more than 75% of the current market price.

LEVERAGE
- Using borrowed money to purchase securities. Leverage increases the margin of profit but
also magnifies any loss.

INVESTIGATORY POWER OVER CRIMINAL PROSECUTION UNDER SRC

- Under the SRC, any criminal complaint for violation of any law regulated or enforced by the
SEC, should first be filed with the SEC (not DOJ).
- Only after the SEC found probable cause will it refer the case to DOJ. Then DOJ will file the
case.
- DOCTRINE OF PRIMARY JURISDICTION: A criminal charge for the violation of the SRC is a
specialized dispute. Hence, it must first be referred to an administrative agency of special
competence.
o BUT: This only refers to CRIMINAL COMPLAINTS, not a civil action for the
nullification of a contract.
o Sale of an unregistered certificate gives the complainant an option to file either a
criminal complaint or civil action. The former must be filed with the SEC, but the
latter must be filed in regular courts.
- Contracts made in violation of SRC are void. A civil action may be filed/

CIVIL LIABILITIES ON ACCOUNT OF FALSE REGISTRATION

Any person who acquires a security, the registration statement of which contains an UNTRUE
STATEMENT of a material fact or OMITS TO STATE A MATERIAL FACT, and who suffers damage
may sue and recover from the following: (ISDA-PUPS)
o Issuer
o Director
o Persons who signed the registration statement (FOE CAC – PRINCIPAL FOE =
financial officer, operating officer, executive officer, accounting officer, comptroller,
corporate secretary)
o Auditor or Auditing Firm which certified any FS used in connection with the
financial statement
o Selling shareholders (they make a certification in connection with the registration
statement)
o Any person who PREPARED or certified any part of the registration statement or a
report or valuation used in connection with the registration statement.
o The UNDERWRITER of the security.

TREBLE DAMAGES + EXEMPLARY DAMAGES + ATTORNEY’S FEES (TEA)

- Treble damages: Up to thrice the amount of the transactions and actual damages
- Liability of ISDA-PUPS for these damages is joint and several (solidary)

CIVIL SUIT TO RECOVER DAMAGES (FILE WITH THE RTC, SCC)

1. False registration
2. Prospectus, Communications and Reports
3. Securities Fraud
4. Security Prices Manipulation
5. Commodity Futures Contract and Preneed Plans)
6. Insider Trading

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CEASE AND DESIST ORDER (CDO)

- The SEC, after proper investigation or verification, motu proprio, or upon verified complaint
by any aggrieved party, may issue a CDO without the necessity of a prior hearing if in its
judgment the act or practice, unless restrained, will operate as a:
o FRAUD ON INVESTORS or
o is otherwise LIKELY TO CAUSE
 GRAVE OR IRREPARABLE INJURY or
 PREJUDICE TO THE INVESTING PUBLIC
- CDO must issue only AFTER proper investigation or verification. (Clarificatory hearing is
just an initial hearing and does not amount to investigation or verification.

WAIVER OF SRC PROVISIONS IS VOID. (Even the contracts)

SRC provisions are self-executory. (with or without implementing rules)

The repeal of RSA by the SRC does not extinguished criminal liability under:
1. Failure to register security
2. Insider trading
3. Non-disclosure of more than 10% beneficial ownership
This is because these provisions in the RSA were re-enacted in the SRC.

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