contract, instrument, whether written or

SECURITIES REGULATION CODE electronic in character.

RA 8799

KINDS OF SECURITIES

Nature of the Securities Regulation Code 1. Debt instruments – bonds, debentures,

(SRC) notes, evidence of indebtedness, asset-
backed securities.
The SRC is the law that regulates Asset-backed securities (ABS) -
securities (its issuance, distribution and These are financial securities the value of
sale) and the person who deals with such which depends on the assets underlying it.
securities. It is enacted to protect the For investors, ABS are alternative to
public from unscrupulous promoters, who investing in corporate debt. An ABS is
stake business or venture claims which essentially the same thing as a mortgage-
have really no basis, and sell shares or backed security, except that the securities
interests therein to investors. It also backing it are assets such as loans, leases,
serves to protect investors, promote credit card debt, a company’s receivables,
investor confidence, and stabilize the royalty and so on, and not mortgaged-
financial markets. based securities, hence, the risk involved
The law does not guarantee that a in ABS is greater.
person who invests in securities will make
money. The law only ensures that there 2. Other instruments as may in the future
will be a fair and full disclosure of be determined by the SEC.
information regarding securities so that the
investor could make an informed judgment. 3. Derivatives– options and warrants
(Divina, 2014)
Options– are contracts that give the buyer
the right, but not the obligation, to buy or
State policy with regard to the SRC sell an underlying security at a
1. Establish a socially-conscious free predetermined price called the exercise or
market that regulates itself. strike price, on or before a predetermined
2. Encourage widest participation of date, called the expiry date, which can only
ownership in enterprises. be extended in accordance with Exchange
3. Enhance democratization of wealth. rules. (Sundiang Sr. & Aquino, 2014)
4. Promote development of the capital
market. Kinds of Options
5. Protect investors. a. Call option – option to buy
6. Ensure full and fair disclosure about b. Put option – option to sell
securities. c. Straddle – combination of both call and
7. Minimize, if not totally eliminate, insider put option.
trading and other fraudulent or
manipulative devices and practices which Warrants - are rights to subscribe or
creates distortion in the free market. purchase new shares or existing shares in
a company, on or before a predetermined
date called the expiry date, which can only
DEFINITION OF SECURITIES be extended in accordance with Exchange
rules. Warrants generally have a longer
Securities are shares, participation exercise period than options.
or interests in a corporation or in a
commercial enterprise or profit-making
venture and evidenced by a certificate,
4. Investments instruments – Investment
contracts, fractional undivided interests in Q: Betty Go Gabionza and other investors
oil, gas, or other mineral rights. lent, invested or deposited money with
ASBHI. For this, ASBHI issued two (2)
Investment contract – is a contract, postdated checks to its lenders, one
transaction or scheme whereby a person representing the principal amount and the
invests his money in a common enterprise other covering the interest thereon. On the
and is led to expect profits primarily from maturity of the checks, the individual
the efforts of others. lenders renewed the loans, either
collecting only the interest earnings or
Howey Test rolling over the same with the principal
For an investment contract to exist, amounts. After sometime, DBS Bank
the following elements must concur: refused to pay for the
a. A contract, transaction or scheme; checks by virtue of “stop payment” orders
b. An investment of money; from ASBHI. The series of events led to
c. Investment is made in a common the filing of the complaints by Gabionza, et
enterprise; al., for Estafa under Article 315(2)(a) and
d. Expectation of profits; and (2)(d) of the Revised Penal Code, Estafa
e. Profits arising primarily from the effort under PD No. 1689, violation of the
of others. Revised Securities Act and violation of the
General Banking Act. The DOJ concluded
Network marketing - a scheme adopted by that ASHBHI, et al., are liable for violating
companies to get people to buy their such prohibition against the sale of
products outside the usual retail system unregistered securities. However, the CA
where products are brought from the reversed the
store’s shelf and where the buyer can DOJ holding that the postdated checks
become a down-line seller, earning issued by ASBHI did not constitute a
commissions from purchases made by new security under the Revised Securities Act.
buyers whom he refers to the person who Are the checks issued by ASHBHI
sold the product to him, is not an “securities”?
investment contract. The commissions are A: YES. The checks issued constitute
incentives to down-line sellers to bring in securities; hence, the non-registration
other customers. These can hardly be thereof is a violation of the Revised
regarded as profits from investment of Securities Act. It is one thing for a
money under the Howey Test. corporation to issue checks to satisfy
(SEC v. Prosperity.Com, Inc., G.R. No. isolated individual obligations, and another
164197, January 25, 2012) for a corporation to execute an elaborate
scheme where it would portray itself to the
5. Equity instruments – Shares of stock, public as a pseudoinvestment house and
certificates of interest or participation in a issue postdated checks instead of stocks or
profit sharing agreement, certificates of traditional securities to evidence the
deposit for a future subscription, investments of its patrons. The Revised
proprietary or non-proprietary membership Securities Act is geared towards the
certificates in corporations. maintainance of the stability of the national
investment market against activities such
6. Trust instruments – Certificates of as those apparently engaged in by ASBHI.
assignments, certificates of participation, ASBHI adopted this scheme in an attempt
trust certificates, voting trust certificates to circumvent the Revised Securities Act,
or similar instruments. [SRC, Sec. 3.1 (e)] which requires a prior license to sell or
--- deal in securities. It bears pointing out that
the definition of “securities” set forth in
CASE SAMPLE Section 2 of the Revised Securities Act
includes “commercial papers evidencing XPNs: The following need not be
indebtedness of any person, financial or registered:
non-financial entity, irrespective of 1. Exempt securities; and
maturity, issued, endorsed, sold, 2. Securities sold in exempt transactions.
transferred or in any manner conveyed to XPN TO XPN: SRC provides that the resale
another. A check is a commercial paper of securities previously sold in an exempt
evidencing indebtedness of any person, transaction must be registered.
financial or non-financial entity. Since the Effect of non-registration
checks in this case were generally rolled The issuer would be penalized. Issuers of
over to augment the creditor’s existing securities not registered shall be subjected
investment with ASBHI, they most to criminal, civil and administrative
definitely take on the attributes of charges.
traditional stocks. A different rule would ---
open the floodgates for a similar scheme,
by companies without prior license or CASE SAMPLE
authority from the SEC. This cannot be Q. ABC Corp. is engaged in the pawnshop
countenanced. (Gabionza v. CA, G.R. No. business involving cell phones, laptops and
161057, September 12, 2008) other gadgets of value. In order to expand
--- its business and attract investors, it offered
to any person who invests at least
Test on determining whether or not it is a P100,000.00 a “promissory note” where it
security obligated itself to pay the holder a 50%
return on investment within one month.
Does it represent a share, Due to the attractive offer, many
participation, or interest in a commercial individuals invested in the company but not
enterprise or any profit making venture? If one of them was able to realize any profit
yes, then, it is a security. If it is a security, after one month. Has ABC Corp. violated
then, it cannot be sold, or offered for sale any law with its scheme? Explain.
or distribution within the Philippines
without a registration statement duly filed A: YES. ABC Corp. violated the provisions
with and approved by the SEC. (Divina, of the Securities Regulation Code that
2014) prohibits sale of securities to the public,
like promissory, without a registration
statement filed with and approved by the
Requirement before securities are sold or Securities and Exchange Commission.
offered for sale or distribution within the ---
Philippines
Q: Timeshare Corp. sold to Spouses Cortez
They are required to be registered one timeshare of Laguna de Boracay. After
with and approved by the SEC. Registration sometime, the SEC issued a resolution to
also includes the disclosure to SEC of all the effect that Timeshare Corp. was
material and relevant information about the without authority to sell securities, like
issuer of the security. Prior to the sale, the timeshares. It held therefore that the
information on the securities, in such form purchaser may
and with such substance as the SEC may exercise the option to unilaterally rescind
prescribe, shall be made available to each the purchase agreement and receive the
prospective purchaser. (SRC, Sec. 8.1) refund of money paid applies to all
purchase agreements entered into by
GR: Securities must be registered with and Timeshare Corp. prior to the effectivity of
approved by SEC. the Registration Statement. Hence,
REASON: To protect the public from fraud. Spouses Cortez demanded their right to
cancel their contract, as it appears that
Laguna de Boracay is selling said shares established without proof of the reading of
without license or authority from the SEC. the registration statement by such person.
Despite repeated demands, Timeshare (SRC, Sec. 56.2)
Corp. failed
and refused to refund the same. Timeshare
Corp. contends that its mere registration as Securities market professionals (persons
a corporation already authorized it to deal who deal with securities)
with unregistered timeshares. Does the 1. Broker – A person engaged in the
registration of Timeshare Corp. as a business of buying and selling securities
corporation authorize it to deal with for the account of others. (SRC, Sec.3.3)
unregistered timeshares? 2. Dealer– Any person who buys and sells
securities for his/her own account in the
A: NO. Mere registration as a corporation ordinary course of business. (SRC, Sec.
does not authorize it to deal with 3.4)
unregistered timeshares. Corporate 3. Associated person of a broker or dealer
registration is just one of several – He is an employee of a broker or dealer
requirements before it may deal with who directly exercises control of
timeshares. Prior to fulfillment of all the supervisory authority, but does not include
other requirements of Section 8, a salesman, or an agent, or a person,
Timeshare Corp. is absolutely proscribed whose functions are solely clerical or
from dealing with unregistered timeshares. ministerial. (SRC, Sec. 3.5)
No securities, except of a class exempt 4. Salesman – He is a natural person,
under the SRC or unless sold in any employed as such, or as an agent, by a
transaction exempt under the same, shall dealer, issuer or broker to buy and sell
be sold or offered for sale or distribution to securities; but for the purpose of
the public within the Philippines unless registration, shall not include any employee
such securities shall have been registered of an issuer whose compensation is not
and permitted to be sold as provided by the determined directly or indirectly on sales
SRC. (Timeshare Realty Corporation v. of securities of the issuer.(SRC, Sec 3.13)
Cesar Lao, G.R. No. 158941, February 11,
2008)
--- Obligation of the broker to his client

Validity of the sale of shares acquired 12 The primary obligation of the broker
months after the approval of the is to ensure his account’s compliance with
Registration Statement the law. (Abacus Securities Corp. v. Ampil,
G.R. No. 160922, February 27, 2006)
If the person who acquired the
security sued any of the enumerated NOTE: Since a brokerage relationship is
persons under Sec. 56.1 for recovery of essentially a contract for the employment
damages after the issuer has made of an agent, the law on contracts governs
generally available to its security holders the broker-principal relationship.
an income statement covering a period of
at least twelve (12) months beginning from
the effective date of the registration Registration of security market
statement, then the right of recovery shall professionals
be conditioned on proof that such person
who acquired the security relying upon Security market professionals are
such untrue statement in the registration required to be registered. No broker shall
statement or relying upon the registration sell any securities unless he is registered
statement and not knowing of such income with the SEC. (Revised Securities Act, Sec.
statement, but such reliance may be
1,) (Nicolas v. CA, et al., G.R. No. 12285, reports under the regime of full and fair
March 27, 1998) disclosure.
---
RATIONALE: The listed securities are
Q: Can a stock broker without license from exempted because they are either
the SEC, recover management fees guaranteed by the government or they are
allegedly earned from handling the already regulated by another government
securities transactions of a client? agency or body other than the SEC.
A: NO. An unlicensed person may not EXEMPT TRANSACTIONS
recover compensation for services as a
broker where a statute or ordinance is EXEMPT TRANSACTIONS
applicable and such is of a regulatory
nature. 1. Any judicial sale, or sale by an executor,
--- administrator, guardian, receiver or trustee
EXEMPT SECURITIES in insolvency or bankruptcy.
EXEMPT SECURITIES 2. Those sold by a pledge holder,
mortgagee, or any other similar lien holder,
1. Any security issued or guaranteed by to liquidate a bona fide debt a security
the Government of the Philippines, or by pledged in good faith as security for such
any political subdivision or agency thereof, debt.
or by any person controlled or supervised 3. Those sold or offered for sale in an
by, and acting as an instrumentality of said isolated transaction for the owner’s
government. account and the owner not being an
2. Any security issued or guaranteed by underwriter.
the government of any country with which 4. Distribution by the corporation of
the Philippines maintains diplomatic securities to its stock holders or other
relations, or by any state, province or security holders as stock dividends or
political subdivision thereof on the basis of distribution out of surplus.
reciprocity. Provided, that the SEC may 5. Sale of capital stock of a corporation to
require compliance with the form and its own stockholders exclusively wherein
content of disclosures the Commission may no commission or remuneration is paid or
prescribe. given directly or indirectly in connection
3. Certificates issued by a receiver or by a with the sale of such capital stock.
trustee in bankruptcy duly approved by the NOTE: Also, this sale must not involve an
proper adjudicatory body. underwriter or financial advisor.
4. Any security or its derivatives the sale 6. Bonds or notes secured by a mortgage
or transfer of which, by law, is under the upon real estate or tangible personal
supervision and regulation of the Office of property, where the entire mortgage
Insurance Commission, Housing and Land together with all the bonds or notes
Use Regulatory Board, or the Bureau of secured thereby are sold to a single
Internal Revenue. purchaser at a single sale.
5. Any security issued by a bank except its 7. Issue and delivery of any security in
own shares of stock (which serves to exchange for any other security of the
promote the sale of securities issued by same issuer pursuant to the right of
heavily regulated banks). conversion entitling the holder of the
6. Other securities as determined by the security surrendered in exchange to make
SEC by rule or regulation, after public such conversion.
hearing. (SRC, Sec. 9) 8. Broker’s transactions executed upon
customer’s orders, on any registered
Being an issuer of an exempt Exchange or other trading market.
security does NOT exempt such issuer 9. Share subscriptions in capital stock prior
from the requirement of submission of to incorporation or in pursuance of an
increase in its authorized capital stock RATIONALE: Although the securities
under the Corporation Code when no themselves must still be registered, the
expense is incurred, or no commission, sale or issue need not be registered
compensation or remuneration is paid or because the investors involved herein are
given in connection with the sale or considered as highly sophisticated
disposition of such securities, and only investors or specialized investors and as
when the purpose for soliciting, giving or such, have a greater risk tolerance or do
taking of such subscriptions is to comply not need strict protection from the
with the requirements of such law as to the Commission.
percentage of the capital stock of a
corporation which should be subscribed
before it can be registered and duly NOTE: List of exempt transactions under
incorporated, or its authorized capital SRC is NOT exclusive
increased.
10. Exchange of securities by the issuer The list is not exclusive. The
with its existing security holders Commission may exempt other
exclusively, when no commission or other transactions, if it finds that the
remuneration is paid or given directly or requirements of registration under the
indirectly for soliciting such exchange. Code is not necessary in the public interest
11. Sale by issuer to fewer than 20 persons or for the protection of the investors such
in the Philippines during any 12 month as by reason of the small amount involved
period, otherwise known as private or the limited character of the public
placement transactions. offering. (SRC, Sec. 10.02)
Requisites: NON-EXEMPT
1. Sale to not more than 19 non-
institutional retail investors; NOT EXEMPT
2. The security is made payable to a
specific person; All securities, unless specifically
3. Security is non-negotiable and exempted by law, shall not be sold or
nonassignable; and offered for sale or distribution within the
4. It is in an amount not exceeding fifty Philippines, without a registration
(50) million pesos. statement duly filed with and approved by
12. Sale of securities to any number of the the Commission. (SRC, Sec. 8.1)
following Qualified Buyers:
a. banks;
b. registered investment houses; Purpose for registration of securities
c. insurance companies;
d. pension funds or retirement plans Registration of securities allows the
maintained by the Government of the subsequent release of these securities to
Philippines or any political subdivision the investing public and serves to protect
thereof or managed by a bank or other investors.
persons authorized by the Bangko Sentral
to engage in trust functions, investment
companies; Procedure for registration of securities
e. investment companies; and
f. other persons or entities ruled qualified 1. Application – All securities required to
by the SEC on the basis of such factors be registered shall be registered through
such as financial sophistication, net worth, the filing by issuer with SEC, of a sworn
knowledge, and experience in financial and registration statement with respect to such
business matters, or amount of assets securities in such form and containing such
under management. (SRC, Sec. 10.1) information or documents as the
Commission shall prescribe.
2. Prospectus – The registration statement such other manner as the Commission by
shall include any prospectus required or rule shall prescribe, reciting that:
permitted to be delivered. a. A registration statement for the sale of
3. Other information– The information such security has been filed;
required for the registration of any kind b. The aforesaid registration statement as
and all securities shall include, among well as the papers attached thereto is open
others, the effect of the securities’ issue to inspection at the Commission during
on ownership, on the mix of ownership, business hours; and
especially foreign and local ownership. c. Copies thereof, photo static or
4. Signatories to registration statement– otherwise, shall be furnished to interested
The registration statement shall be signed parties at such reasonable charges as the
by the issuer’s: Commission may prescribe.
a. Executive officer 9. Ruling – Within 45 days after the date of
b. Principal operating officer the filing of the registration statement, or
c. Principal financial officer by such later date to which the issuer has
d. Comptroller consented, the SEC shall declare the
e. Principal accounting officer registration statement effective or
f. Corporate secretary or persons rejected, unless the applicant is allowed to
performing similar functions amend the registration statement. The
NOTE: It shall be accompanied by a duly Commission shall enter an order declaring
verified resolution of the Board of the registration statement to be effective if
Directors of the issuer corporation. it finds that the registration statement
5. Written consent of Expert – The written together with all the other papers and
consent of the expert named as having documents attached thereto is on its face
certified any part of the registration complete and that the requirements have
statement or any document used in been complied with. The Commission may
connection therewith shall also be filed. also impose such terms and conditions as
6. Certification by selling stockholders– may be necessary or appropriate for the
Where the registration statement includes protection of the investors.
shares to be sold by the selling 10. Effectivity – Upon effectivity of the
shareholders, a written certification by registration statement, the issuer shall
such selling shareholders as to the state under oath in every prospectus that
accuracy of any part of the registration all registration requirements have been
statement contributed by such selling met and that all information are true and
shareholders shall also be filed. correct as represented by the issuer or the
7. Fees – Upon filing of the registration one making the statement.(SRC, Sec. 12)
statement, the issuer shall pay to the SEC NOTE: Any untrue statement or fact of
a fee of not more than one tenth of one omission to state a material fact required
percent (1/10 of 1%) of the maximum to be stated therein or necessary to make
aggregate price at which such securities the statement therein not misleading shall
are proposed to be offered; the SEC shall constitute fraud.
prescribe by rule, diminishing the fees in
inverse proportion, the value of the
aggregate price of the offering. Grounds for rejection of a registration
NOTE: This fee paid to the SEC is called a statement and revocation of the effectivity
diminishing fee. of a registration statement and the
8. Notice and Publication – Notice of the registration of a security
filing of the registration statement shall be
immediately published by the issuer, at its After due notice and hearing by
own expense, in two newspapers of issuing an order to such effect, the
general circulation in the Philippines; once Commission may reject the registration
a week for two consecutive weeks, or in
statement or revoke the registration of a
security based on the following grounds: Grounds for suspension of registration
1. The issuer:
a. Has been judicially declared insolvent; 1. If any time, the information contained in
b. Has violated any of the provisions of the the registration statement filed is or has
Code, the rules promulgated pursuant become misleading, incorrect, inadequate
thereto, or any order of the SEC of which or incomplete in any material respect.
the issuer has notice in connection with the 2. The sale or offering for sale of the
offering for which a registration statement security registered thereunder may work
has been filed; or tend to work a fraud.
c. Has been or is engaged or is about to 3. Pending investigation of the security
engage in fraudulent transactions; registered, if the Commission deems it
d. Has made any false or misleading necessary, to ascertain whether the
representation of material facts in any registration of such security should be
prospectus concerning the issuer or its revoked on any ground specified in the
securities; or SRC.
e. Has failed to comply with any 4. Refusal to furnish information required
requirement that the Commission may by the Commission. (SRC, Sec. 15)
impose as a condition for registration of
the security for which registration
statement has been filed. Grounds for suspension or cancellation of
certificate of registration
2. The registration statement is on its face
incomplete or inaccurate in any material 1. Fraud in procuring registration.
respect or includes any untrue statement of 2. Serious misrepresentation as to
a material fact or omits to state a material objectives of corporation.
fact required to be stated therein or 3. Refusal to comply with lawful order of
necessary to make the statements therein SEC.
not misleading; 4. Continuous non-operation for at least 5
3. The issuer, any officer, director or years.
controlling person of the issuer, or any 5. Failure to file By-laws within required
person performing similar functions, or any period.
underwriter has been convicted by a 6. Failure to file reports.
competent judicial or administrative body, 7. Other similar grounds. (SRC, Sec. 6 [L])
upon plea of guilty, or otherwise, of an
offense involving moral turpitude and/or
fraud or is enjoined or restrained by the Order of suspension by the SEC requires a
SEC or other competent judicial or subsequent hearing
administrative body for violations of
securities, commodities and other related An order of suspension must be
laws; and followed by a hearing to be conducted by
4. Any issuer who refuses to permit the the Commission. If the Commission
examination to be made by the determines that the sale of any security
Commission. (SRC, Sec. 13) should be revoked, it shall issue an order
prohibiting the sale of such security. Until
NOTE: The Commission may compel the the issuance of a final order, the
production of all the books and papers of suspension of the right to sell, though
the issuer, and may administer oaths to, binding upon the persons notified thereof,
and examine the officers of such issuer or shall be deemed confidential, and shall not
any other person connected therewith as to be published, unless it shall appear that the
its business and affairs. order of suspension has been violated after
notice. However, if the Commission finds
that the sale of the security will neither be price movement in a security, which may
fraudulent nor result in fraud, it shall trick investors into trading in these
forthwith issue an order revoking the order securities because of the alleged trading
of suspension, and such security shall be volume or indications of interest;
restored to its status as a registered c. Squeezing the float – refers to taking
security as of the date of such order of advantage of a shortage of securities in the
suspension. market by controlling the demand side and
exploiting market congestion during such
shortages in a way to create artificial
PROHIBITIONS ON FRAUD, prices. This prevents the actual market
MANIPULATIONS AND INSIDER TRADING from determining the price of these
MANIPULATION OF SECURITY PRICES securities;
Acts which are considered as manipulation d. Hype and dump – engaging in buying
of security prices activity at increasingly higher prices and
then selling securities in the market at the
The price of securities should be higher prices;
dictated by market forces. It cannot be e. Boiler room operations – refers to
pegged or stabilized. The following acts activities that involve the use of high
are considered as manipulation of security pressure sale tactics such as direct mail
prices and are therefore prohibited: offers or telephone follow-ups to investors
1. Transactions intended to create a false to promote purchase and sale of securities
or misleading appearance of active trading wherein there is misrepresentation in these
in any listed security traded in an securities. This is a fraudulent transaction
Exchange or any other trading market: that tricks investors into trading in a fake
a. Wash Sale – is a transaction in which market;
there is no genuine change in the beneficial f. Daisy chain – refers to a series of
(or actual) ownership of a security; purchase and sales of the same issue at
b. Matched Sale – is a change of ownership successively higher prices by the same
in the securities by entering an order for group of people with the purpose of
the purchase or sale of a security with the manipulating prices are drawing
knowledge that a simultaneous order of unsuspecting investors into the market
substantially the same size, time, and price, leaving them defrauded of their money and
for the sale or purchase of any such securities;
security, has or will be entered by or for g. Front-Running – is the prohibited
the same or different parties; or practice of a broker-dealer executing its
c. Similar transactions where there is no proprietary order before the customer’s
change of beneficial ownership. order for the same security. This violates
the fiduciary responsibility by the broker-
2. Effecting a series of transactions that dealer to its customer accounts as well as
will raise or depress the price of securities placing the customer’s order first; or
to induce the purchase or sale of securities h. Churning – involves the excessive
respectively, or creating active trading to trading of securities by a broker-dealer in
induce transactions through manipulative a customer’s discretionary account in order
devices: to generate commissions, without regard to
a. Marking the close – buying and selling of the customer’s investment objective.
securities at the close of the market in an
effort to alter the closing price of these 3. Circulating or disseminating information
securities; that the price of any security listed in an
b. Painting the tape – engaging in a series Exchange will or is likely to rise or fall
of transactions effected by brokers in because of manipulative market operations
securities that are reported publicly to give of any one or more persons conducted for
the impression or illusion of activity or the purpose of raising or depressing the
price of that security for the purpose of Insider
inducing the purchase or sale of such
security. A person who is in possession of
corporate material information not
4. To make false or misleading statement generally available to the public.
with respect to any material fact, which he
knew or had reasonable ground to believe Who may be an insider:
was so false or misleading, for the purpose
of inducing the purchase or sale of any 1. The issuer;
security listed or traded in an Exchange. 2. A director or officer (or person
performing similar functions) of, or a
5. To effect, either alone or with others, person controlling the issuer;
any series of transactions for the purchase 3. A person whose relationship or former
and/or sale of any security traded in an relationship to the issuer gives or gave him
exchange for the purpose of pegging, access to material information about the
fixing or stabilizing the price of such issuer or the security that is not generally
security, unless otherwise allowed by the available to the public;
Code or by rules of the Commission. (SRC, 4. A government employee, or director , or
Sec. 24) officer of an exchange, clearing agency
and/or self-regulatory organization who
has access to material information about an
Short sales issuer or a security that is not generally
available to the public; or
It is the selling of shares which the 5. Constructive Insider – A person who
seller does not actually own or possess learns such information by a
and therefore he cannot, himself, supply communication from any of the foregoing
the delivery. Short selling leads to insiders. (SRC, Sec. 3.8)
speculation of price of securities.
Other prohibited acts in an insider trading

Short swing transaction 1. For an insider to communicate material

non-public information about the issuer or
It is a transaction by the director, the security to any person who by virtue of
issuer or any person controlling the issuer the communication thereby becomes an
(stockholder owning 10% of the stocks), insider, where the original insider
whereby such person buys and sells communicating the information knows or
securities within six (6) months. has reason to believe that such person will
FRAUDULENT TRANSACTIONS likely buy or sell a security of the issuer
The following are considered as fraudulent while in possession of such information.
transactions: (SRC, Sec. 27.3)
1. Employment of any device, scheme or 2. When a tender offer has commenced or
artifice to defraud investors; is about to commence, it is unlawful for any
2. Obtaining money or property by means person, other than the tender offeror, who
of any untrue statement of a material fact is in possession of material non-public
or any omission to state a material fact information relating to such tender offer to
necessary in order to make the statement buy or sell the securities of the issuer that
made not misleading; and are sought or to be sought by such tender
3. Engaging in any act, transaction, offer, if such person knows or has reason
practice or course of business, which to believe that the information is non-
operates as a fraud or deceit upon any public and has been acquired directly or
person. indirectly from the tender offer, or those
acting on its behalf, the issuer of the
securities sought or to be sought by such Grand Gas Corporation saw the exploration
tender offer, or any insider of such issuer. reports which were mistakenly sent to
(SRC, Sec. 27.4 [a][i]) their
3. When a tender offer has commenced or establishment together with other materials
is about to commence, it is also unlawful to be printed. They too bought shares in
for any tender offeror, or those acting on the
its behalf, the issuer of securities covered company at low prices and later sold them
by such tender offer, and any insider, to at huge profits. Will they be liable for
communicate material non-public violation of the SRC? Why? (2008 Bar)
information to any person relating to the
tender offer which would likely result in A:
violation of prohibition of the insider from a. The directors and officers of the
trading. (SRC, Sec. 27.4 [a][ii]) corporation violated Sec. 27 of the
Securities and Regulation Code on the
prohibition on insider’s trading. Sec. 27.1
Material non-public information of the Securities and Regulation Code
provides that it shall be unlawful for an
1. Information about the issuer or the insider to sell or buy a security of the
security has not been generally disclosed issuer, while in possession of material
to the public and would likely affect the information with respect to the issuer or
market price of the security after being the security that is not generally available
disseminated to the public and the lapse of to the public. In this case, the directors and
a reasonable time for the market to absorb officers fall squarely into the definition of
the information; or an insider under Sec. 3.8 of the Securities
2. Would be considered by a reasonable and Regulation Code. Thus, the directors
person important under the circumstances and officers are liable for violating the
in determining his course of action whether prohibition on Insider trading.
to buy, sell or hold a security. (SRC, Sec. b. The said employees will also be liable
27.2) for engaging in insider trading. Sec. 3.8 of
--- the Securities and Regulation Code, an
insider is also a person whose relationship
SAMPLE CASE or former relationship to the issuer gives
Q: Grand Gas Corporation, a publicly listed or gave him access to material information
company, discovered after extensive about the issuer or security that is not
drilling a rich deposit of natural gas along generally available to the public. The said
the coast of Antique. For five (5) months, employees because of their relationship
the company did not disclose the discovery with the issuer, Grand Gas Corporation as
so that it could quietly and cheaply acquire their printer, where able to obtain material
neighboring land and secure mining rights information. They too became liable for
to the land. Between the discovery and its insider trading when they bought the
disclosure of the information to the shares in the company and at the same
Securities and Exchange Commission, all time possessing undisclosed material
the directors and key officers of the information.
company bought shares in the company at ---
very low prices. After disclosure, the price
of the shares went up. The directors and Possible defenses against insider trading
officers sold their shares at huge profits.
a. What provision of the Securities 1. That the information was acquired not
Regulation Code (SRC) did they violate, if on account of his relationship with the
any? Explain. issuer.
b. Assuming that the employees of the
establishment handling the printing work of
2. That he disclosed the information to the dilutes the share value of their
other party who knew or had the reason to investments. It affords such minority
believe he knew the material information. shareholders the opportunity to withdraw
3. That the purchaser or seller was not or exit from the company under reasonable
aware of the material, non-public terms or a chance to sell their shares at
information at the time of the purchase or the same price as those of the majority
the sale. stockholders.

PROTECTION OF INVESTORS Public company

Provisions in the SRC intended to protect 1. Those listed on an exchange;

the investors 2. Those with assets of at least PHP 50M
and having 200 shareholders owning at
1. Tender Offer Rule least 100 shares each; or
2. Rules on Proxy Solicitation 3. Those companies that have an effective
3. Disclosure Rule registration statement under Section 12 of
the SRC.
Tender offer means a publicly
announced intention by a person acting
alone or in concert with other persons to Mandatory tender offer
acquire equity securities of a public
company. It is also an offer by the Tender offer is required to be made
acquiring person to stockholders of a when:
public company for them to tender their
shares therein on the terms specified in the 1. Any person or group of persons acting in
offer. (Cemco Holdings, Inc. v. National concert, who intends to acquire fifteen
Life Insurance Co, Inc. G.R. No. 171815, percent (15%) of equity securities in a
August 7, 2007) It is an invitation by the public company in one or more transactions
acquirer of shares of a company for other within a period of twelve (12) months.
stockholders to tender their shares to the 2. Any person or group of persons acting in
acquirer so that they may sell their shares concert, who intends to acquire thirty five
in the same price and conditions as the percent (35%) of the outstanding voting
previously acquired shares. shares or such outstanding voting shares
It is given to all stockholders by: that are sufficient to gain control of the
1. Filing with the SEC a declaration to that board in a public company in one or more
effect, and paying the filing fee; transactions within a period of twelve (12)
2. Furnishing the issuer a statement months. If the tender offer is
containing the information required of the oversubscribed, the aggregate amount of
issuers as SEC may prescribe, including securities to be acquired at the close of
subsequent or additional materials; or such tender offer shall be proportionately
3. Publishing all requests or invitations for distributed across selling shareholders with
tender, or materials making a tender offer whom the acquirer may have been in
or requesting or inviting letters of such private negotiations and other
security. shareholders. For purposes of SRC Rule
19.2.2, the last sale that meets the
threshold shall not be consummated until
Purpose of tender offer the closing and completion of the tender
offer
Tender offer is in place to protect
the interest of minority stockholders of a NOTE: If the acquisition is made through
target company against any scheme that the Exchange trading system tender offer
is not required provided after acquisition shares. Control may be effected through a
through the Exchange trading system, they direct and indirect acquisition of stock, and
fail to acquire their target of thirty five when this takes place, irrespective of the
percent (35%) or such outstanding voting means, a tender offer must occur. (Cemco
shares that is sufficient to gain control of Holdings Inc. v. National Life Insurance
the board. Co.Inc., G.R. No. 171815, August 7, 2007)
3. Any person or group of persons acting in
concert, who intends to acquire thirty five Illustration of the application of tender
percent (35%) of the outstanding voting offer in direct acquisition:
shares or such outstanding voting shares
that are sufficient to gain control of the The shares of stock of X company
board in a public company directly from are owned by A (19%), B (16%), C (20%),
one or more stockholders. The sale of D (14%), E (31%). If Aljon buys the shares
shares pursuant to the private transaction of A (19%), the transaction is not subject to
or block sale shall not be completed prior mandatory tender offer. However, if Aljon
to the closing and completion of the tender buys the shares of A (19%) and the shares
offer. of B (16%), then tender offer must be made
4. Any acquisition that would result in because the total shares bought by Aljon is
ownership of over fifty percent (50%) of 35%.
the total outstanding equity securities of a
public company. Illustration of the application of tender
offer in indirect acquisition:
NOTE: Tender offer shall be made at a
price supported by a fairness opinion The shares of stock of X company
provided by an independent financial are owned by A (16%), B (19%), C (15%),
advisor or equivalent third party. The D (18%), and Corporation E (32%)
acquirer in such a tender offer shall be respectively. The shares of Corporation E
required to accept all securities tendered. are owned by Kenneth (50%), King (25%)
(2015 SRC Rules, Sec. 19.2) and Jacq (25%). If Aljon acquires the
shares of B (19%), the transaction is not
subject to mandatory tender offer because
Coverage of the application of tender offer it did not reach the 35% threshold limit
required by law. However, if Aljon acquires
The mandatory tender offer rule the shares of B (19%) and the shares of
covers not only direct acquisition but also Kenneth in Corporation E (50% of 32 is
indirect acquisition or “any type of 16%), then, tender offer must be made
acquisition.” The legislative intent of because the total shares bought by Aljon
Section 19 of the Securities Regulation directly and indirectly is 35%.
Code is to regulate activities relating to Obligations of person making a tender offer
acquisition of control of the listed company
and for the protection of the minority 1. Make an announcement of his intention
stockholders of a listed corporation. in a newspaper of general circulation, prior
Whatever may be the method by which to the commencement of the offer.
control of a public company is obtained, 2. At least (2) business days prior to the
either through the direct purchase of its date of the commencement of the tender
stocks or through an indirect means, offer:
mandatory tender offer applies. What is a. File with the SEC a required form for
decisive is the determination of the power tender offer including all exhibits thereto
of control. The legislative intent makes (and any amendments thereto), with the
clear that the type of activity intended to prescribed filing fees; and
be regulated is the acquisition of control of b. Hand deliver a copy of such form
the listed company through the purchase of including all exhibits (and amendments
thereto) to the target company and its XPN: The Monetary Board may increase or
principal executive office and to each decrease the above percentages, in order
Exchange where such class of target to achieve the objectives of the
company’s securities are listed for trading. Government with due regard for promotion
3. Report the results of the tender offer by of the economy and prevention of the use
filing with the SEC, not later than ten (10) of excessive credit.
calendar days after the termination of the
tender offer, copies of the final
amendments to the form. (Sundiang Sr. & Purposes of the margin requirements
Aquino, 2014)
They are primarily intended to
achieve a macroeconomic purpose – the
Unlawful and prohibited acts relating to protection of the overall economy from
tender offers excessive speculation in securities. Their
recognized secondary purpose is to protect
It shall be unlawful for any person small investors.
to:
1. Make any untrue statement of a material
fact or omit to state any material fact Burden of compliance with margin
necessary in order to make statements requirements
made, in the light of the circumstances
under which they are made, not misleading; The brokers and dealers have the
or burden of compliance with margin
2. Engage in any fraudulent, deceptive, or requirements.
manipulative acts or practices, in
connection with any tender offer or request NOTE: In securities trading, the brokers
or invitation for tenders, or any solicitation are essentially the counterparties to the
of security holders in opposition to or in stock transactions at the Exchange. Since
favor of any such offer, request, or the principals of the broker are generally
invitation. undisclosed, the broker is personally liable
for the contracts thus made. Brokers have
a right to be reimbursed for sums advanced
Margin trading by them with the express or implied
authorization of the principal. (Abacus
A kind of trading that allows a broker Securities Corp.v. Ampil, G.R. No. 160016,
to advance for the customer/investor part February 27, 2006)
of the purchase price of the security and to RULES ON PROXY SOLICITATION
keep the same security as collateral for Requisites for valid proxy solicitation
such advance.
1. It must be in writing.
2. It must be signed by the stockholder or
Margin allowance standard his duly authorized representative.
3. It must be filed before the scheduled
GR: The credit extended must be for an meeting with the corporate secretary.
amount not greater than, whichever is (SRC, Sec. 20.2)
higher of:
1. 65% of the current market price of the NOTE: For public companies, the period to
security; or submit proxy solicitation should not be
2. 100% of the lowest market price during later than five (5) days before the meeting
the preceding 36 calendar months, but not unless the by-laws provides for a longer
more than 75% of the current market price. period. Unless otherwise provided in the
proxy, the proxy shall be valid only for the
meeting for which it is intended. No proxy
shall be valid and effective for a period Suspension of disclosure
longer than five (5) years at one time. It may be suspended for any fiscal
year after the year such registration
became effective if such issuer as of the
Rules on proxy solicitation with regard to first day of any such fiscal year, has less
broker or dealer than 100 shareholders of such class of
securities and it notifies the Commission of
1. No broker or dealer shall give any such. (SRC IRR, Rule 17.1)
proxy, consent or authorization, in respect
of any security carried for the account of a End of disclosure requirement
customer, to a person other than the
customer, without the express written GR: Disclosure does not end because once
authorization of such customer. an issuer becomes a reporting company, it
2. A broker or dealer who holds or remains as such even when the registration
acquires the proxy for at least 10% or such of securities has been revoked. (SRC IRR,
percentage as the Commission may Rule 13)
prescribe of the outstanding share of the
issuer, shall submit a report identifying the XPN: If the primary license is revoked.
beneficial owner within 10 days after such
acquisition, for its own account or XPN to the XPN: In the case of hospitals
customer, to the issuer of the security, to and educational institutions if the primary
the Exchange where the security is traded license is revoked, the disclosure
and to the Commission. (SRC, Sec. 20.4, requirement still continues because of
20.5) public interest.

Reportorial requirements
Jurisdiction over violations of the SEC
rules on proxy solicitation 1. Issuers:
a. Shall file with the Commission within 135
The power of the SEC to investigate days, after the end of the issuer’s fiscal
violations of its rules on proxy solicitation year, or such other time as the Commission
is unquestioned when proxies are obtained may prescribe, an annual report which shall
to vote on matters unrelated to the cases include among others, a balance sheet,
enumerated under Section 5 of PD 902-A. profit and loss statement and statement of
However, when proxies are solicited in cash flows, for such last fiscal year,
relation to the election of corporate certified by an independent certified public
directors, the resulting controversy, even accountant, and a management discussion
if it ostensibly raised the violation of the and analysis of results of operations; and
SEC rules on proxy solicitation, should be b. Such other periodical reports for interim
properly seen as an election controversy fiscal periods and current reports on
within the jurisdiction of the RTC special significant developments of the issuer as
commercial court. (GSIS vs. CA, G.R. Nos. the Commission may prescribe as
183905 and 184275, April 16, 2009) necessary to keep current information on
DISCLOSURE RULE the operation of the business and financial
condition of the issuer. (SRC, Sec. 17)
Beginning of disclosure requirement
2. Types of issuers required to file
It begins at registration and reports:
continues periodically through the regular a. An issuer which has sold a class of its
filing of periodic report. securities pursuant to a registration
statement under Section 12 of the SRC;
b. An issuer with a class of securities listed CIVIL LIABILITY
for trading in an Exchange;
c. An issuer with assets of at least PHP Grounds for civil liability to arise
50M and having 200 or more holders each
holding at least 100 shares 1. False Registration Statement (SRC, Sec.
56)
3. Persons acquiring securities - If the 2. Fraud in connection with prospectus,
issuer is one that has to make a report, any communications and reports (SRC, Sec. 57)
person who acquires directly or indirectly 3. Fraud in connection with security
the beneficial ownership of more than 5% transactions (SRC, Sec. 58)
of such class, or in excess of such lesser 4. Manipulation of security prices (SRC ,
per centum as the Commission by rule may Sec. 60)
prescribe, shall, within 10 days after such 5. Insider trading (SRC, Sec. 61)
acquisition or such reasonable time as
fixed by the Commission, submit to the
issuer of the security, to the Exchange Persons that may be liable in case of false
where the security is traded, and to the registration statement
Commission a sworn statement containing:
a. His personal circumstances 1. The issuer and every person who signed
b. The nature of such beneficial ownership the registration statement.
c. If the purpose was to acquire control of 2. Every person who was a director of, or
the business, any plans the recipient may any other person performing similar
have affecting a major change in the functions, or a partner in, the issuer at the
business time of the filing of the registration
d. The number of shares beneficially statement or any part, supplement or
owned, and the number of shares for which amendment thereof with respect to which
there is a right to acquire his liability is asserted.
e. granted to such person or his associates 3. Every person who is named in the
f. Information as to any agreement with a registration statement as being or about to
third person regarding the securities (SRC, become a director of, or a person
Sec. 18) performing similar functions, or a partner
in, the issuer and whose written consent
4. Persons that has beneficial ownership of thereto is filed with the registration
10% or more statement.
- Every person who is directly or 4. Every auditor or auditing firm named as
indirectly the beneficial owner of more having certified any financial statements
than 10% of any class of any equity used in connection with the registration
security, or who is director or an officer of statement or prospectus.
the issuer of such security, shall file: 5. Every person who, with his written
a. Statement with the SEC and, if such consent, which shall be filed with the
security is listed for trading on an registration statement, has been named as
Exchange, also with the Exchange, of the having prepared or certified any part of the
amount of all equity securities of such registration statement, or as having
issuer of which he is the beneficial owner; prepared or certified any report or
b. Within 10 days after the close of each valuation which is used in connection with
calendar month, if there is a change in the registration statement, with respect to
ownership during such month, a statement the statement, report, or valuation, which
indicating his ownership at the close of the purports to have been prepared or certified
calendar month and such changes in his by him.
ownership as have occurred during such 6. Every selling shareholder who
calendar month. (SRC, Sec. 23) contributed to and certified as to the
accuracy of a portion of the registration
statement, with respect to that portion of Prescriptive period for filing of action
the registration statement which purports Two (2) years after the discovery of
to have been contributed by him. the facts constituting the cause of action
7. Every underwriter with respect to such and within five (5) years after such cause
security. (SRC, Sec. 56) of action accrued.

Persons liable for fraud in connection with Jurisdiction over civil liabilities
prospectus, communications and reports The court which has jurisdiction over
cases involving civil liabilities is the
Any person who offers to sells or Regional Trial Court.
sells:
1. In violation any provisions on
registration of securities; or Limitation for awarding damages
2. By the use of any means or instruments 1. The court can award not exceeding
of transportation or communication, by triple the amount of the transaction plus
means of a prospectus or other written or actual damage.
oral communication. (SRC, Sec. 57.1) 2. The court is also authorized to award
attorney’s fees not exceeding 30% of the
award.
Persons liable for fraud in connection with
security transactions
Award of exemplary damages
Any person who engages in any act The court may award exemplary
or transaction in violation of Sections 19.2, damages in cases of:
20 or 26 of SRC. 1. Bad Faith;
2. Fraud;
3. Malevolence; or
Persons liable for the manipulation of 4. Wantonness in the violation of SRC or
security prices the Rules and Regulations promulgated by
the Commission.
Any person who willfully participates
in any act or transaction in violation of
Section 24 of SRC shall be liable to any RESPONSIBILITY AND
person who shall purchase or sell any PRIMARY OBJECTCTIONS
security at a price which was affected by
such act or transaction.

Persons liable with regard to insider

trading
Any person in case of legal tender
who:
1. Purchases or sells a security while in
possession of material information not
generally available to the public;
2. Communicates material non-public
information.
NOTE: The liability of the persons
enumerated shall be jointly and severally.