VIII. SECURITIES REGULATION CODE (R.A. No. 8799) Flashcards
VIII. SECURITIES REGULATION CODE (R.A. No. 8799)
A. Framework for Regulating of Securities Trading (Sections 8-10)
Framework for Regulating Securities Trading in the Philippines (Bar Exam Prep)
The Philippine Securities Regulation Code (SRC) establishes a framework to ensure investor protection and market integrity through securities registration and transaction exemptions.
A.
Registration Requirements (Section 8):
* Issuers must register most securities with the Securities and Exchange Commission (SEC) before offering or selling them within the Philippines (Section 8.1).
* This registration process involves providing detailed information about the issuer and the securities.
* The SEC may impose conditions on registration or request additional disclosures (Sections 8.2 & 8.3).
* A public register of registered securities is maintained for investor access (Section 8.4).
* The SEC can audit issuers’ financials to verify information (Section 8.5).
B.
Exempt Securities (Section 9):
Certain securities are exempt from registration, including:
1) Government-issued securities (National or foreign with reciprocity) (Section 9.1(a) & (b))
2) Court-approved sale certificates from receivership or bankruptcy (Section 9.1(c))
3) Securities already regulated by other agencies (e.g., Insurance Commission) (Section 9.1(d))
4) Bank-issued securities (except the bank’s own stock) (Section 9.1(e))
NOTE: The SEC can add further exemptions through public hearings if deemed appropriate (Section 9.2).
C.
Exempt Transactions (Section 10):
- Certain transactions involving securities are exempt from registration, including:
1) Court-ordered sales, executor/administrator sales, or bankruptcy/insolvency sales (Section 10.1(a))
2) Sales by pledge holders, mortgagees, or lien holders to recover a debt (Section 10.1(b))
3) Isolated sales by an owner or their representative, not part of a repeated pattern (Section 10.1(c))
4) Stock dividends or other distributions by a corporation to its own shareholders (Section 10.1(d))
5) Issuing additional company stock exclusively to existing shareholders without commission (Section 10.1(e))
6) Issuing secured bonds or notes sold in their entirety to a single purchaser (Section 10.1(f))
7) Exchanging securities of the same issuer based on pre-existing conversion rights (Section 10.1(g))
8) Brokerage transactions on a registered exchange based on customer orders (Section 10.1(h))
9) Pre-incorporation subscriptions or authorized capital stock increases with no commissions paid (Section 10.1(i))
10) Exchanges of securities solely between an issuer and existing holders, with no commissions paid (Section 10.1(j))
* Issuer sales to less than 20 people within a year in the Philippines (Section 10.1(k))
D.
Qualified Buyers (Section 10.1(l)):**
* Sales to certain qualified buyers are exempt, such as banks, investment houses, insurance companies, or other SEC-designated entities with a high financial profile.
- Additional Considerations:
- The SEC can grant exemptions for other transactions deemed unnecessary for public interest or investor protection, considering factors like transaction size or offering limitations (Section 10.2).
- Filing fees apply for claiming transaction exemptions (Section 10.3).
- Example:**
- A small tech start-up wants to raise capital by selling shares to a limited group of accredited investors (qualified buyers). Under the regulations, they might be exempt from full registration if they meet the requirements for qualified buyer sales (Section 10.1(l)).
- Conclusion:**
Issuers must navigate the registration process or identify applicable exemptions, while investors can rely on these regulations to ensure transparency and protection in securities transactions.
VIII. SECURITIES REGULATION CODE (R.A. No. 8799)
B. Concept of Securities; Howey Test (Section 3)
Understanding Securities and the Howey Test
This regulation defines what constitutes a “security” and connects it to the Howey Test. Here’s a breakdown:
- Securities Defined:**
- A security is a share, participation, or interest in a venture aimed at making profits.
- It can be evidenced by physical certificates, contracts, or electronic records.
- Examples of Securities:**
a) Traditional Investments:= Stocks, bonds, debentures, notes (promissory notes)
b) Investment Contracts:= Contracts promising returns based on the efforts of others (e.g., investment funds)
c) Fractional Ownership:= Interests in oil, gas, or mineral rights divided among multiple owners
d) Derivatives:= Options and warrants (contracts tied to the value of other assets)
e) Collective Ownership Certificates:= Certificates representing membership or ownership in corporations, trusts, or similar entities
- Howey Test Connection:**
This definition is crucial for the Howey Test, a legal test used to determine if an investment qualifies as a security and thus subject to regulations.
- Howey Test Criteria:**
a) An investment of money
b) In a common enterprise
c) With a reasonable expectation of profits
d) Derived from the efforts of others
Example:
Imagine someone sells you membership in an oil well operation. You invest money (criterion 1) with the hope of profiting from the well’s production (criterion 3). This profit relies on the efforts of others managing the operation (criterion 4). The membership certificate you receive might be considered a security (based on the definition) and the transaction would be subject to regulations if it meets all Howey Test criteria.
Key Point: The Howey Test helps identify investment schemes that function similarly to traditional securities, even if structured differently, and brings them under regulatory oversight.
VIII. SECURITIES REGULATION CODE (R.A. No. 8799)
C. Registration of Securities (Section 8)
1. Exempt Securities – Section 9
Key Points of Exempt Securities under the Philippine Securities Regulation Code:
This section defines certain securities that are generally exempt from registration requirements under the Code. Here’s a breakdown:
1) Government-Backed Securities:** These don’t require registration because they’re considered low-risk due to government backing.
* Examples: Bonds issued by the Philippine government, treasury bills.
2) Foreign Government Securities:** Securities issued by governments of countries with diplomatic relations with the Philippines might also be exempt, with potential disclosure requirements set by the Securities and Exchange Commission (SEC).
* Example: Bonds issued by a foreign government, subject to SEC review.
3) Court-Approved Instruments:** Certificates issued by court-appointed receivers or bankruptcy trustees are exempt, as they’re already under court oversight.
4) Securities Regulated by Other Agencies:** Securities already regulated by other government agencies like the Insurance Commission or Bureau of Internal Revenue are exempt from double regulation.
5) Bank-Issued Securities (Except Stock):** A bank’s own bonds or other debt instruments are exempt, but the bank’s stock issuance still requires registration.
6) Future Exemptions:** The SEC has the authority to add more security classes to the exempt list if deemed unnecessary for investor protection.
- Overall, these exemptions aim to streamline regulations and reduce burdens on issuers of low-risk or already-regulated securities.
VIII. SECURITIES REGULATION CODE (R.A. No. 8799)
C. Registration of Securities (Section 8)
- Exempt Transactions – Section 10
Exempt Transactions Under Philippine Securities Regulation Code (Section 10.1)
This section outlines various transactions exempt from registration requirements under the Code.
Exempt Transactions:
1) Court-Ordered Sales (a):** Securities sold through court orders, executor sales, or bankruptcy proceedings.
2) Debt Collection (b):** Pledged securities sold by lenders (pledge holders, mortgagees) to collect legitimate debts.
3) Isolated Transactions (c):** One-time sales by owners or their representatives, not part of repeated offerings.
4) Stock Dividends (d):** Distributions of additional stock to existing shareholders from a company’s surplus.
5) Limited Stock Sales to Existing Shareholders (e):** Sales of a corporation’s own stock exclusively to current shareholders without commissions.
6) Single-Purchaser Mortgages (f):** Issuing bonds or notes secured by a mortgage, sold entirely to a single buyer.
7) Security Conversions (g):** Exchanging existing securities for new ones based on pre-defined conversion rights.
8) Brokerage Transactions (h):** Trades executed by brokers on behalf of customers on registered exchanges.
9) Pre-incorporation Subscriptions (i):** Subscriptions for shares before a company is officially incorporated, with no commissions involved.
10) Security Exchanges with Existing Holders (j):** Exchanges of securities offered by the issuer solely to existing security holders, with no commissions.
11) Limited Private Placements (k):** Sales of securities by an issuer to fewer than 20 people in the Philippines within a year.
12) Sales to Qualified Buyers (l):** Sales to entities like banks, investment houses, pension funds, or other qualified buyers designated by the Commission.
- Additional Considerations:**
- The Commission has the authority to exempt other transactions deemed unnecessary for investor protection (e.g., small offerings).
- Filing a notice and paying a minimal fee are required when claiming an exemption.
- Examples:**
- A bank sells a defaulted borrower’s stock to recover a debt (exempt under b).
- A company issues additional shares (stock dividend) to its existing shareholders (exempt under d).
- A corporation offers its own stock for sale exclusively to current shareholders at a discounted price (exempt under e, if no commissions are paid).
- A wealthy investor purchases all the bonds secured by a company’s real estate mortgage (exempt under f).
Challenging Multiple Choice Questions on Securities and the Howey Test:
Question 1:
A company sells memberships in a vineyard. Members can purchase these memberships at different tiers, with higher tiers offering exclusive access to tastings and events. However, all members have the right to purchase bottles of wine directly from the vineyard at a discounted price. The company emphasizes the potential value appreciation of the vineyard over time. Does this membership likely qualify as a security under the Howey Test?
(a) Yes, because the membership offers potential profit through investment appreciation.
(b) No, because the primary benefit appears to be access to discounted wine and events.
(c) Maybe, it depends on how heavily the company promotes the investment potential.
Answer: (b) No, because the primary benefit appears to be access to discounted wine and events.
Reasoning: While there’s a potential for future appreciation, the Howey Test focuses on the reasonable expectation of profits derived from the efforts of others. Here, the main benefit seems to be access to discounted wine and events, not relying solely on the vineyard’s management for profits. However, if the company heavily promotes the investment potential of the membership, with promises of high returns based solely on the vineyard’s success, it might move closer to security territory under the Howey Test.
Question 2:
John invests in a new online gaming platform. He purchases a package that includes in-game currency and exclusive access to beta testing features. The platform promises a future marketplace where players can buy and sell in-game items using the currency, potentially increasing its value. Does John’s investment likely qualify as a security under the Howey Test?
(a) Yes, because the investment involves a virtual currency with potential for profit.
(b) No, because the primary benefit appears to be access to beta testing and in-game features.
(c) Maybe, it depends on the specific rules and limitations of the in-game marketplace.
Answer: (c) Maybe, it depends on the specific rules and limitations of the in-game marketplace.
Reasoning: This scenario touches on several Howey Test criteria. There’s an investment (money spent on the package), a common enterprise (the gaming platform), and potential profit through increased currency value. However, the key question lies in the efforts of others. If the marketplace is fully functional and allows players to freely trade currency for real-world value or other benefits, it strengthens the argument for a security. However, if the marketplace is highly restricted or doesn’t allow real-world value exchange, it might lean away from being a security.
Question 3:
A social media influencer launches a new fitness program. The program offers workout videos, meal plans, and access to an online community forum. However, the influencer also offers a premium tier membership that promises a share of the profits generated from future merchandise sales and brand partnerships. Does the premium membership likely qualify as a security under the Howey Test?
(a) No, because the primary benefit appears to be access to the fitness program materials.
(b) Yes, because the premium tier offers a share of profits from the influencer’s venture.
(c) Maybe, it depends on the structure of the profit-sharing agreement.
Answer: (b) Yes, because the premium tier offers a share of profits from the influencer’s venture.
Reasoning: This scenario fulfills most Howey Test criteria. There’s an investment (premium membership), a common enterprise (the influencer’s fitness program), and the expectation of profits derived from the efforts of others (the influencer and their brand partnerships). The specific profit-sharing structure might have nuances, but the core element of sharing profits from a venture pushes this towards being a security under the Howey Test.
Challenging Multiple Choice Questions on Exempt Securities (Philippine Securities Regulation Code):
Question 1:
A company plans to issue bonds to raise capital for a new development project. The company is majority-owned by the Philippine government, but operates independently with its own board of directors. Do the bonds qualify for exemption from registration under Section 9.1?
(a) Yes, because the company is majority-owned by the government.
(b) No, because the company operates independently and isn’t a direct government agency.
(c) Maybe, it depends on the specific guarantees provided by the government for the bonds.
Answer: (b) No, because the company operates independently and isn’t a direct government agency.
Reasoning: Section 9.1(a) exempts securities “issued or guaranteed by the Government of the Philippines.” While government ownership gives some connection, the key lies in the separate operations and management of the company. The exemption is meant for direct government bonds or those guaranteed by the government, not for securities issued by independent companies with government ownership.
Question 2:
A corporation issues a new class of stock offering investors a share in the company’s profits. However, the investment also promises a fixed annual return, similar to a bond. Does this new class of stock qualify for exemption under Section 9.1?
(a) Yes, because the fixed return feature makes it similar to a government bond.
(b) No, because the Philippines Securities Regulation Code generally regulates stock issuance.
(c) Maybe, it depends on whether the fixed return is guaranteed by another entity.
Answer: (b) No, because the Philippines Securities Regulation Code generally regulates stock issuance.
Reasoning: Section 9.1(e) exempts certain bank-issued securities, but with an exception for a bank’s own stock. This question focuses on stock issuance, which generally requires registration under the Code. The presence of a fixed return doesn’t automatically qualify it as an exempt security under this section. The corporation would likely need to register the stock issuance unless another exemption applies.
Challenging Multiple Choice Questions on Exempt Transactions (Philippine Securities Regulation Code):
Question 1:
A company is planning a stock offering to raise capital for expansion. They intend to sell the stock exclusively to their existing 25 shareholders, with each shareholder receiving an equal number of new shares based on their current ownership percentage. No commissions will be paid for this offering. Does this transaction qualify for exemption under Section 10.1?
(a) Yes, because the sale is limited to existing shareholders and no commissions are involved.
(b) No, because the transaction involves issuing new stock, which generally requires registration.
(c) Maybe, it depends on the total number of outstanding shares after the offering.
Answer: (a) Yes, because the sale is limited to existing shareholders and no commissions are involved.
Reasoning: This scenario falls under Section 10.1(e), which exempts the sale of capital stock by a corporation to its own stockholders exclusively, with no commissions paid. The limitation on the number of shareholders (25) doesn’t disqualify the exemption as long as they are existing shareholders.
Question 2:
A wealthy investor is interested in purchasing all the bonds secured by a company’s property mortgage in one transaction. The total value of the bonds is significant, and the company would avoid the registration process by selling them to this single investor. Does this transaction qualify for exemption under Section 10.1?
(a) Yes, because the sale involves a large investment from a single qualified buyer.
(b) No, because the significant value suggests the transaction might be a public offering in disguise.
(c) Yes, because Section 10.1(f) exempts the issuance of bonds sold entirely to a single purchaser.
Answer: (c) Yes, because Section 10.1(f) exempts the issuance of bonds sold entirely to a single purchaser.
Reasoning: This scenario aligns with Section 10.1(f), which exempts the issuance of bonds or notes secured by a mortgage when the entire package is sold to a single buyer at once. The significant value doesn’t necessarily disqualify it as long as there’s only one purchaser.
Question 3:
A startup company is looking for initial funding. They plan to raise capital by selling convertible notes to a small group of angel investors. These notes will give investors the right to convert them into company stock at a later date. Does this transaction qualify for exemption under Section 10.1?
(a) Yes, because the sale is to a limited group of sophisticated investors.
(b) No, because convertible notes are considered securities and their sale likely requires registration.
(c) Maybe, it depends on the specific terms of the convertible notes and the number of investors involved.
Answer: (b) No, because convertible notes are considered securities and their sale likely requires registration.
Reasoning: While the investor group might be limited, convertible notes are generally considered securities under the Code. While Section 10.1 offers exemptions for certain transactions, the sale of convertible notes isn’t explicitly exempt. Therefore, registration is likely required to comply with the Code.
Challenging MCQs on Philippine Securities Regulation (Bar Prep)
MCQ #1: Applicability of Registration
A large corporation listed on the Philippine Stock Exchange (PSE) plans to offer convertible bonds to the public. These bonds will allow investors to convert them into company shares after a certain period.
Question: Does the corporation need to register these convertible bonds with the SEC under the Philippine Securities Regulation Code?
A. Yes, all publicly offered securities must be registered with the SEC.
B. No, convertible bonds are a type of debt security and are exempt from registration.
C. Registration is required only if the corporation intends to promote the offering to a large number of investors.
D. The SEC has the discretion to decide whether registration is necessary.
Answer: A. Yes, all publicly offered securities must be registered with the SEC.
Legal Reasoning:
- Section 8.1 of the SRC mandates registration for “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.”
- Convertible bonds are considered securities under the Code.
- Public offering implies offering to a broad range of investors (not just a select few qualified buyers under Section 10.1(l)).
MCQ #2: Qualified Buyers and Exemptions
A small company is issuing new shares to raise capital for expansion. They target wealthy individuals who meet the SEC’s definition of “qualified buyers.” The company does not intend to register the offering with the SEC.
Question: Can the company rely on the qualified buyer exemption (Section 10.1(l)) to avoid registration?
A. Yes, as long as the investors meet the qualified buyer definition, registration is not required.
B. No, the qualified buyer exemption only applies to transactions involving existing company shares, not new issuances.
C. The company must still file a notice with the SEC claiming the exemption, even if registration isn’t required.
D. The exemption applies, but only if the company sells the shares to a limited number of qualified buyers (less than 20).
Answer: A. Yes, as long as the investors meet the qualified buyer definition, registration is not required.
Legal Reasoning:
- Section 10.1(l) exempts sales of securities to qualified buyers. The provision doesn’t distinguish between new or existing shares.
- The focus is on the investor qualifications, ensuring a higher level of financial sophistication and risk tolerance.
MCQ #3: Public vs. Private Offering
A company is unsure whether their upcoming securities offering qualifies as public or private, impacting the registration requirement. They plan to sell shares to 30 institutional investors and a small group of high-net-worth individuals.
Question: Should the company register the offering with the SEC?
A. Registration is mandatory because the offering involves more than 20 investors. (Referring to the limit for exempt issuer sales under Section 10.1(k))
B. The number of investors alone isn’t decisive. The SEC considers the nature of the investors and offering methods.
C. Registration is not required as the company is only selling to institutional investors.
D. The company can avoid registration by structuring the offering as a series of smaller, private placements.
Answer: B. The number of investors alone isn’t decisive. The SEC considers the nature of the investors and offering methods.
Legal Reasoning:
- The SRC doesn’t provide a bright-line test for public vs. private offerings.
- Section 10.1 exemptions (like the issuer sale limit) address specific scenarios, not the general distinction.
- The SEC considers factors like the investor sophistication, offering methods (public advertising vs. direct contact), and potential for broad investor participation.
Conclusion:
These MCQs test your understanding of the nuances within the Philippine Securities Regulation Code. By analyzing the specific requirements and exemptions, you can effectively navigate the regulations for both issuers and investors.
