SRC

Question 1

What are the other names of SRC?

Answer 1

Blue sky laws or Truth in Securities

Question 2

What is the most basic provision of the SRC?

Answer 2

It provides that all securities that will be sold to the public in the Philippines will have to be registered with the SEC.

This requirement is the most basic requirement aiming to protect the public.

Note the SEC does not assure or guarantee returns on profits on the investment

Question 2

What’s the registration requirement for securities?

Answer 2

General Rule: Shall not be sold or offered for sale or distributed without a registration statement duly filed and approved by the SEC.

Exceptions: Exempt Securities, Exempt Transactions

Question 2

What are Debt Securities?

Answer 2

Represent Money that is borrowed that must be paid with the terms outlined like amount borrowed, interest rate, and maturity date

Question 2

In the SRC, what are the 2 major classifications of securities?

Answer 2

Debt Securities (Sold in debt/bond market)
Equity Securities (Sold in Stock market)

There are others but they fall under either category

Question 2

What are Equity Securities?

Answer 2

Represent ownership interest held by shareholders in a company.

Question 2

Define securities

Answer 2

Securities are
1. Shares, Participation, or Interests
2. In a corporation, commercial enterprise, or profit making venture
3. Evidenced by a certificate, contract, instrument, whether written or electronic in character.

This means that securities can be more than just shares

Question 2

What is an investment contract?

Answer 2

A contract, transaction, or scheme whereby a person invests his money in a common enterprise as is led to expect profits primarily from the efforts of others.

Question 2

Enumerate the things still considered securities (May also be referred to as Financial Market Instruments)

Answer 2

1. Shares of stock, bonds, debentures, notes, etc.
   (Debt instruments)
2. Investment Contracts, certificates of interest, etc.
   (Equity Instruments)
3. Fractional undivided interests in oil, gas, or other minerals.
   (Investment Instruments)
4. Derivative like options and warrants
   (Derivatives)
5. Certificate of assignments/participation/trusts/etc.
   (Trust Instruments)
6. Proprietary or nonproprietary membership certificates in corps
7. Other instruments that may be determined by the commission in the future.
   (Catch all, aka whatever)

Question 2

What are exempt transactions?

Answer 2

1. Sale in Insolvency/Bankruptcy transactions
2. Debt liquidating Transaction
3. Isolated transactions (Public not really included)
4. Distribution of stock or property dividend transactions.
5. Sale of unissued shares to own shareholders transactions (Public not really included)
6. Secured Bond single sale (You’re selling to one person)
7. Convertible shares
8. Traded shares
9. Subscription for shares
10. Exchange of securities by issuer with its holders
11. Limited Sale (Selling to less than 20 people)
12. Sale to qualified buyers

Parties of exempt transactions don’t need to procure approval from SEC, only a notice identifying the exemption and pay the exemption fee

Question 3

What’s the criteria in a Turner test to determine if its an investment contract?

Answer 3

1. Make an investment of money
2. In a common enterprise
3. With expectation of profit
4. To be derived primarily from the efforts of others

No 4. is a really big gotcha
The Ph uses turner, which is based off the howey test, the only difference is Howey 4. is derived solely, instead of primarily

Question 3

What are exempt securities?

Answer 3

Securities which may be sold without need of SEC Registration
Like
1. Government Securities
Any security issued by the Government of the PH, or by any political subdivision or agency, or by any person controlled or supervised by and acting as an instrument of said government
2. Foreign Government Securities
Basically 1, but the PH needs to be friends with that government, and you may need to comply with some forms.
3. Issued in Bankruptcy Security
Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body.
4. Regulated sale/transfer
Any security/derivative, the sale or transfer of which, by law, is under the supervision and regulation of the Office of the insurance commission, housing and land use rule regulatory board, or the Bureau of Internal Revenue
5. Bank Issued Security
Any security (debt instrument) issued by a bank except its own shares of stock

Sec may add exempt securities, if it finds it unnecessary for the public or protection of investors.
Being an exempt security doesn’t mean you’re exempt from the other provisions, it just means you don’t have to be registered (Mostly because you’re already tracked in a different way)

Question 3

What’s the procedure for registering a security?

Answer 3

1. Pre-Filing stage (You still can’t sell and can’t give information on your security to the public)
2. Filing stage (You file your application which is the registration statement + preliminary prospectus. And make sure you get approval)
3. Pre offering stage (Still can’t sell, but you can now disseminate information to the public via preliminary prospectus)
4. Offering Period (You can now sell as you are registered and approved. Your preliminary prospectus becomes the final prospectus)
5. Notice of Completion (the period of offering is only a limited period of time so yeah lol)

Question 3

What is a preliminary prospectus?

Answer 3

Also Known as Red-Herring Prospectus
Gives you information on the nature of the offering, and information about the company. When disseminating information you need to add a “Filed with the SEC but not yet declared Effective” basically a disclaimer

Question 3

What are prohibitions on the SRC?

Answer 3

Manipulation of Security Prices
Fraudulent transactions
Insider Trading

Question 3

How long is the period to sell securities?

Answer 3

Within 10 days From the date of effectivity of the registration statement
Until the end of the offering period or until the sale is terminated by the issuer

If you don’t commence the sale within 10 days, your registration is cancelled and all fees paid are forfeit

Question 3

What happens to securities not sold?

Answer 3

The underwriter pays for the unsold portion lol.
That’s why they have to work really hard to sell it all

Reminder
Corp needs underwriter to act as the medium for the sale. All sales will be like 90:10 split with 90 being sold through common listing, and 10% to the LSI program

Shares not sold are Shelf Registered Shares

Underwriting is the act or process of guaranteeing, by investment, the distribution and sale of securities issued by another person or enterprise

After 3 years, you can sell your Shelf Registered Shares again by registering it again

Question 3

What are examples of Fraudulent transactions?

Answer 3

1. Employing any device, scheme, artifice to defraud
2. Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made
3. Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person

Question 3

What are examples of manipulation of security prices?

Answer 3

1. Transactions intended to create a false or misleading appearance of active trading.
   -Wash Sale (No genuine change in the beneficial ownership of security)
   -Improper Match Order (Something confusing)
   -Other transactions with no change in ownership
2. Effecting a series of transactions that will raise or depress the price of securities to induce a purchase or sale
   -Marking the close (Buying and selling securities at the close of the market in order to alter the closing price)
   -Painting the Tape (Engaging in transactions that are reported publicly to give the impression or illusion of activity or price movement in a security)
   -Squeezing the float (Taking advantage of a shortage by controlling the demand to create artificial prices)
   -Pump and Dump (Buying it at higher and higher prices, then sell it for even more)
   -Boiler room
   -Daisy Chain (Fake transactions to lure innocent people)
   -Front running (A broker using its position to order before customers)
   -Churning (Excessive trading in a customers account to generate commissions, without regard to the investment objective)
3. Circulating or Disseminating Information that the price of any security will likely rise or fall because of manipulative market operations.
4. Making False or misleading statements with respect to any material fact, which he knew or had reasonable ground to believe was so false or misleading for the purpose of inducing a purchase/sale
5. To effect, either alone or with others, any series of transactions for the purpose of pegging/fixing/stabilizing the price of securities unless otherwise allowed by the SEC

Question 3

What is Insider Trading?

Answer 3

An insider is a person in possession of corporate material info, not generally available to the public. Which includes the issuer, director or controller of the issuer, and anyone whose relationship or former relationship to the issuer gives him access to material info, that is generally not available.
Also includes government employees who have access to information about an issuer or security not available to the public. And a person who learns such info by communication with other insiders

Being an insider isn’t bad, but insider trading is.

General rule: Unlawful for insider to buy and sell info of the issuer while having possession of material info not generally available to the public. UNLESS
-If the other party selling/buying is identified and the insider proves that he disclosed the information to the other party

Material Information just remember Materiality from CFAS
But in law it can be
A. Not publicly disclosed and would very much affect market prices after being disseminated
B. Would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell, or hold a security