Securities Regulations

• Securities


  Shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character
• Main feature of a security

  • A person purchases or acquires the same in the expectation of obtaining passive income or asset appreciation, that is income or gain obtained through the effort of another person
• Types of securities

  • Shares of stocks
  • Bonds
  • Debentures
  • Notes evidences of indebtedness
  • Asset-backed securities
  • Investment contracts
  • Certificates of interest or participation in a profit-sharing agreement
  • Certificates of deposit for a future subscription
  • Fractional undivided interests in oil, gas or other mineral rights
  • Derivatives like option and warrants
  • Certificates of assignments
  • Certificates of participation
  • Trust certificates
  • Voting trust certificates or similar instruments
  • Proprietary or nonproprietary membership certificates in corporations
  • Other instruments as may in the future be determined by the Commission
• Investment contract


  A contract, transaction, or scheme whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others
• Requisites of an investment contract

  • An investment of money
  • In a common enterprise
  • With expectation of profits
  • Primarily from the efforts of others
• Illustration: Power Homes Unlimited Corp. (PHUC)

  • An investor pays $234 to become a Business Center Owner (BCO), which entitles him to recruit two persons who should pay $234 each and out of which he shall receive a commission of $92. In case the two referrals/enrollees would recruit a minimum of four (4) persons each recruiting two (2) persons who become his/her own down lines, the BCO will receive a total amount of US$147.20, and so on. Here, the BCO is considered as an investment contract because the investor would be earning primarily from the efforts of his recruits and their recruits, as the pyramid goes on.
• Securities and Exchange Commission (SEC)

  Composed of a Chairman and seven Commissioners who are given a 7-year term and has security of tenure to protect them from political influence
• The following formerly under the jurisdiction of the SEC has been transferred to Special Commercial Courts:
• Registration of securities

  Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the SEC. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.
• The Commission may audit the financial statements, assets and other information of firm applying for registration of its securities whenever it deems the same necessary to insure full disclosure or to protect the interest of the investors and the public in general.
• Securities exempt from registration

  • Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government
  • Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity
  • Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body
  • Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue
  • Any security issued by a bank except its own shares of stock
• Tender offer


  An offer by a person or group of persons to the stockholders of a corporation to tender their shares for purchase
• Purpose of mandatory tender offer rule

  To protect minority shareholders and provide them with a fair price for their share whenever a person or group of persons intends to buy a sizable number of shares in the company
• Mandatory tender offer

  • Applies to any person who intends to acquire at least 35% over a period of 12 months (previously 30, increased by the SEC pursuant to Section 72.1 of the SRC) of any class of any equity security of a listed corporation or a corporation with assets of at least P50M and having at least 200 shareholders who each have at least 100 shares
  • Applies even if the acquisition is less than 35% but will result in ownership of over 51% of the total outstanding equity securities of the public company
  • The offeror would be required to accept any and all securities thus tendered
• Illustration: U Corporation

  • U Corporation, a corporation listed in the PSE, has two principal stockholder- corporations, X Corporation which owns 60% and ABC Corporation which owns 17%. In turn, the principal stockholders of X Corporation are: XA (21%); XB (30%) and ABC Corporation (9%). XA and XB agreed to sell their shares to ABC Corporation. In this case, the mandatory tender offer rule applies to ABC Corporation as they will own 60% of X Corporation (21% +30% +9%), and X Corporation likewise owns 60% of U Corporation, resulting in 36% (60% * 60%) indirect ownership. Accordingly, they will own a total of 53% of U Corporation (36% indirect ownership + 17% direct ownership), and ABC Corporation is required to make a tender offer to the stockholders of U Corporation.
• Transactions exempt from the Mandatory Tender Offer Requirement

  • Any purchase of shares from the unissued capital stock provided that the acquisition will not result to a 50% or more ownership of shares by the purchaser
  • Any purchase of shares from an increase in authorized capital stock
  • Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where the acquisition is made by the debtor or creditor
  • Purchases in connection with privatization undertaken by the government of the Philippines
• Tender offer procedure

  At least 2 business days prior to the date of the commencement of the tender offer:

  File SEC Form 19-1 with the SEC including all exhibits thereto and pay the prescribed filing fees

  Hand deliver a copy of such form including all exhibits to the target company at its principal executive office and to each Exchange where such class of the target company's securities are listed for trading

  Report the results of the tender offer by filing with the Commission, not later than ten (10) calendar days after the termination of the tender offer, copies of the final amendments to the form
• Material Non-Public Information

  Information that will affect the price of the security or would influence a person in deciding whether to buy, sell, or hold a security which is not available to the public
• Insiders


  • The issuer
  • A director or officer of the issuer or a person controlling the issuer
  • A person whose relationship or former relationship to the issuer gives or gave him access to material non-public information
  • A government employee, or director, or officer of an exchange, clearing agency, and/or self-regulatory organization who has access to material non-public information
  • A person who learns such information by a communication from any of the foregoing insiders
• Insider Trading


  When an insider in possession of material non-public information buys or sells a security
• Tender offer reporting

  1. Make announcement of intention in newspaper prior to commencement

  2. File report with Commission not later than 10 calendar days after termination
• Insiders


  • The issuer
  • A director or officer of the issuer or a person controlling the issuer
  • A person whose relationship or former relationship to the issuer gives or gave him access to material non-public information
  • A government employee, or director, or officer of an exchange, clearing agency, and/or self-regulatory organization who has access to material non-public information
  • A person who learns such information by a communication from any of the foregoing insiders
• Exceptions for insider trading

  • When the person can prove the information was not gained from an insider
  • If the other party is identified and the insider disclosed the information or had reason to believe the other party is also in possession of the information
• A purchase or sale of a security of the issuer made by an insider or such insider's spouse or relatives by affinity or consanguinity within the 2nd degree, legitimate or common-law, shall be presumed to have been effected while in possession of material non-public information if transacted after such information came into existence
• Exceptions to the presumption of insider trading

  • Purchases in connection with corporate rehabilitation under court supervision
  • Purchases through an open market at the prevailing market price
  • Merger or consolidation
• Insider trading where information relates to a tender offer

  It is unlawful for any person (other than the tender offeror) who is in possession of material nonpublic information relating to such tender offer, to buy or sell the securities of the issuer that are sought or to be sought by such tender offer if such person knows or has reason to believe that the information is nonpublic and has been acquired directly or indirectly from the tender offeror, those acting on its behalf, the issuer of the securities sought or to be sought by such tender offer, or any insider of such issuer
• Wash sale


  Any transaction in a security which involves no change in the beneficial ownership
• Matched order


  An order or orders for the purchase or sale of security with the knowledge that a simultaneous order or orders of substantially the same size, time and price for the sale or purchase of such security has, or will be entered by or for the same or different parties
• Wash sales and matched orders are not illegal in themselves, but are considered fraudulent whenever they are resorted to in order to create a false or misleading appearance of active trading
• Marking the close


  Placing of purchase or sale order, at or near the close of the trading period in order to affect the closing price likewise affecting the opening price the following day
• Painting the tape

  Buying activity among nominee accounts at increasingly higher or lower prices or causing fictitious reports to appear on the ticker tape
• Squeezing the float

  Intentionally holding part or portion of the issue/security which is outstanding with a view of reselling them later for profit, thereby affecting supply of the security or its availability while demand remains the same or increases, driving the prices up
• Hype and Dump

  1. Purchase of outstanding capital stock of a dormant public shell company for a nominal amount

  2. Merger of the shell company with the privately held company to gain control of the majority of the stocks

  3. Reverse-split of the shares

  4. Reissuance of the shares certificates in the name of the merged entity to relatives and associates

  5. Hiring a broker-dealer to market the stocks

  6. Hiring a promoter to "hype" the virtues of the company

  7. When the market reaches the high price, they would "dump" their shareholdings and bail out
• Boiler Room Operations

  An intensive selling campaign through numerous salesmen by telephone or through direct mail offerings for securities of either a certain type or from a specific issuer, inducing investors to purchase through hard-sell techniques based on unfounded predictions and mailing of misleading market letters
• Wash sales, matched orders, marking the close, painting the tape, squeezing the float, hype and dump, and boiler room operations become illegal/unlawful if effected to raise the price or induce the purchase, depress the price to induce the sale, or create active trading to induce such purchase or sale
• Circulating or Disseminating Information on Share Price Movement

  Providing information that the price of any security listed in the exchange will or is likely to rise or fall because of manipulative market operations of any one or more persons conducted for the purpose of raising or depressing the price of the security and thus inducing the purchase or sale of such security
• Making False or Misleading Statements

  With respect to any material fact, which the person knew or had some reasonable grounds to believe was so false or misleading for the purpose of inducing the purchase or sale of any security
• Pegging or Fixing or Stabilizing the price of security


  Effected either alone or with others through any series of transactions for the purchase or sale thereof, if done for such purpose
• Short Sale


  Selling the security which the vendor does not own and borrowed only from another