Securities Regulation Code (RA No 8799) PDF

SECURITIE S REGULATIO N CODE XGBERMIC SECURITIES REGULATION CODE (RA NO 8799) Purpose: The Securities Regulations Code or RA No. 8799 aims to protect the investing public through a system of disclosure and provide punishment for fraudulent practices. PROTECTION OF THE PUBLIC Requiring...

SECURITIE S REGULATIO N CODE XGBERMIC SECURITIES REGULATION CODE (RA NO 8799) Purpose: The Securities Regulations Code or RA No. 8799 aims to protect the investing public through a system of disclosure and provide punishment for fraudulent practices. PROTECTION OF THE PUBLIC Requiring full disclosure of information to the public regarding the securities that are being offered and the issuers, including the filing and approval of the registration statement and the statement of the prospectus The requirement of regularly submitting material information to the SEC Close monitoring of the securities and other circumstances that may affect the same as well as the persons involved including brokers, issuers, the exchange itself, etc. in order to ensure compliance with pertinent laws and regulations Prohibiting and penalizing different fraudulent practices and transactions Providing the SEC with the powers and functions SECURITI ES 3 of RA 8799 Section “Securities” are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. SECURITIES The main feature of a security is that 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. SECURITIES INCLUDE: Shares of stock, 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 Derivates like option and warrants Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments Proprietary or non proprietary membership certificates incorporation Other instruments as may in the future be determined by the Commission INVESTMENT CONTRACT Investment contract is 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: 1. An investment of money 2. In a common enterprise 3. With expectation of profits 4. Primarily from the efforts of others (use of Howey Test) INVESTMENT CONTRACT ILLUSTRATION: Power Homes Unlimited Corp. (PHUC) requires an investor to pay $234 to become a Business Center Owner (BCO), which entitles him to recruit two person 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. (Power Homes Unltd. Corp. v. SEC, G.R. No. 164182, 26 February 2008) REGISTRATION AND REPORTORIAL REQUIREMENTS REGISTRATION The Securities Regulations Code (SRC) provides that 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 ensure full disclosure or to protect the interest of the investors and the public in general. 1. Filing of SWORN REGISTRATION STATMENT containing the information as the SEC may by rule require 2. PAYMENT of the filing fees which shall not exceed 1/10 of 1% of the aggregate price at which such securities are proposed to be offered 3. PUBLICATION of notice of the filing of the PROCEDURE registration statement in two newspapers of OF general circulation once for two consecutive weeks REGISTRATION 4. Within 45 days after the date of filing, or why such later date to which the issuer has consented, the SEC shall give an ORDER declaring the registration statement effective or rejecting it 5. PROSPECTUS under oath that all requirements satisfied and all statements in registration statement and in such prospectus are correct SWORN REGISTRATION STATEMENT a) Signatories to registration statement: Executive officer, principal operating officer, principal financial officer, comptroller, principal accounting officer, corporate secretary b) Written consent of the expert named as having certified any part of the registration statement, whenever necessary c) Where the registration statement includes shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders shall also be filed  SWORN REGISTRA TION STATEMEN T PROSPE CTUS “Prospectus” is the document made by or on behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through a registration statement filed with the Commission. SECURITIES EXEMPT FROM REGISTRATION (GRIB) 1. 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. 2. 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: Provided, That the SEC may require compliance with the form and content for disclosures the SEC may prescribe. 3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. SECURITIES EXEMPT FROM REGISTRATION (GRIB) 4. 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. 5. Any security issued by a bank except its own shares of stock. TRANSACTIONS EXEMPT FROM REGISTRATION (BISCEPS SMILE) 1. BROKER’S transaction, executed upon customer’s orders, on any registered Exchange or other trading market. 2. An ISOLATED transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transaction of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security. 3. The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a STOCK dividend or other distribution out of surplus. TRANSACTIONS EXEMPT FROM REGISTRATION (BISCEPS SMILE) 4. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of CONVERSION entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under the SRC or was, when sold, exempt from the provision of the SRC, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under the SRC. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold. 5. EXCLUSIVE SALE: The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock. 6. PRIVATE PLACEMENT: The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period. TRANSACTIONS EXEMPT FROM REGISTRATION (BISCEPS SMILE) 7. SUBSCRIPTIONS for shares of the capitals stocks of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized, capital increase. TRANSACTIONS EXEMPT FROM REGISTRATION (BISCEPS SMILE) 8. Sale to SOPHISTICATED (Qualified) Buyers: The sale of securities to any number of the following qualified buyers: – Bank – Registered investment house – Insurance company – Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or managed by a bank or other persons authorized by the Bangko Sentral to engage in trust functions – Investment company – Such other person as the SEC may rule by determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management TRANSACTIONS EXEMPT FROM REGISTRATION (BISCEPS SMILE) 9. MORTGAGE-BACKED SECURITIES: The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale. 10. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in INSOLVENCY or bankruptcy. 11. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of SRC, to LIQUIDATE a bonafide debt, a security pledged in good faith as security for such debt. 12. The EXCHANGE of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange. TRANSACTIONS EXEMPT FROM REGISTRATION (BISCEPS SMILE) The SEC may exempt other transactions where not necessary in public interest or for protection of investors such as small amount or limited character of public offering. However, an exemption fee of 1/10 of 1% of the maximum aggregate price or issued value of the securities should be paid. REPORTOR IAL REQUIREM ENTS REPORTORIAL REQUIREMENTS 1. Annual report composed of a Balance Sheet, Profit and Loss Statement, and a Statement of Cash Flows certified by a CPA and a management discussion and analysis of results of operation 2. Other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the SEC may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer. REPORTORIAL REQUIREMENTS These reportorial requirements shall apply to an issuer: 1. Which has sold a class of its securities pursuant to a registration 2. With a class of securities listed for trading in an Exchange 3. With assets of at least Fifty million pesos (50,000,000.00) or such other amount as the SEC shall prescribe, and having two hundred (200) or more holders each holding at least one hundred (100) share of a class of its equity securities: Provided, however, That the obligation of such issuer to file report shall be terminated ninety (90) days after notification to the SEC by the issuer that the number of its holders holding at least one hundred (100) share reduced to less than one hundred (100) FILING OF GENERAL INFORMATION SHEET All corporations shall file their General Information Sheet (GIS) within 30 calendar days from: 1. Stock corporations – date of annual stockholders’ meeting 2. Non-Stock corporations – date of annual members’ meeting 3. Foreign corporations – anniversary date of the issuance of SEC license GENERAL INFORMA TION SHEET FILING OF ANNUAL FINANCIAL STATEMENTS 1. Corporations using the calendar year: depending on the last numerical digit of their SEC registration or license number in accordance with the schedule set by the SEC. However, any corporations may file their AFS regardless of the last numerical digit or license number on or before the first day stated in the coding schedule. 2. Corporations using the fiscal year: a) General Rule: 120 calendar days from the end of the fiscal year; b) Exceptions: i. Broker dealers – 110 calendar days from the end of the fiscal year; ii. Listed companies and Public Companies – 105 days from the end of the fiscal year The AFS, other than the consolidated financial statements, shall have the stamped “received by the Bureau of Internal Revenue (BIR)” or its authorized banks,  INSIDER TRADING AND OTHER FRAUDULENT TRANSACTION S INSIDER TRADING INSIDER TRADING: is committed whenever an insider, in possession of a material non-public information, transacts on the securities. 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. INSIDER TRADING Insider: 1. The issuer. 2. A director or officer of the issuer or a person controlling the issuer. 3. A person whose relationship or former relationship to the issuer gives or gave him access to material non-public information. 4. 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. 5. A person who learns such information by a communication from any of the foregoing insiders. INSIDER TRADING Exceptions: a person in possession of material non-public information can buy or sell securities: 1. When he can prove that the information was not gained from an insider; 2. If the other party is identified and that he: a. Disclosed the information; or b. Had reason to believe that the other party is also in possession of the information. INSIDER TRADING Presumption: 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: 1. After such information came into existence; 2. But prior to the dissemination of such information to the public and the lapse of a reasonable time for the market to absorb such information. INSIDER TRADING ILLUSTRATION: Gas Gas Corporation, a publicly listed company, discovered a rich deposit of natural gas. This information was not made public in order to acquire the lands in the surrounding area at cheap prices. Prior to the disclosure of the information to the SEC, the directors and officers of the company bought shares of the Corporation. The prices of such shares went up once the discovery was made public. Are the directors and officers liable for insider trading? Yes, the directors and officers, being such are considered insiders and are informed of the discovery, which is a material information which would affect the share price of the corporation. Since they traded (bought) the shares of the company prior to the disclosure of the information, they are liable for insider trading. INSIDER TRADING ILLUSTRATION 2: Assuming, employees of a printing company who handles the printing work of Gas Gas Corporation came into contact with the exploration reports which were sent to their department by mistake together with the materials intended to be printed, and such employees bought shares of the company at low prices and later sold them at huge profits. Are the employees liable for insider trading? No. In this instance, the employees cannot be considered insiders since they acquired the information not because of any relationship that they with Gas Gas Corporation. Likewise, they obtained the information not by “a communication” but because of error. FRAUDULENT TRANSACTIONS AND OTHER MARKET 1. Wash sale – any transaction in a security which involves no change in the beneficial ownership. A series of buy and sale transaction may be placed by MANIPULATIONS one and the same beneficial owner in the exchange which would not affect any change of ownership of the shares transacted. 2. Matched Order – refers to 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 Sale and Matched Orders are not in themselves illegal. But they are considered fraudulent whenever they are resorted to in order to create a false or misleading appearance of active trading. FRAUDULENT TRANSACTIONS AND OTHER MARKET 3. 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 MANIPULATIONS opening price the following day. 4. Painting the tape – akin to marking the close but the activity is made during normal trading hours which involves buying activity among nominee accounts at increasingly higher or lower prices or causing fictitious reports to appear on the ticker tape. 5. Squeezing the float – part or portion of the issue/security which is outstanding but intentionally held by dealers or other person 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. FRAUDULENT TRANSACTIONS AND OTHER MARKET 6. Hype and Dump – involves the following steps: a. Purchase of outstanding capital stock of a dormant public shell company for a nominal MANIPULATIONS b. amount; Merger of the shell company with the privately held company of the person or group of persons involved to gain control of the majority of the stocks of the merged entity; c. Reverse-split of the shares d. Reissuance of the shares certificates in the name of the merged entity to relatives and associates; e. Hiring a broker-dealer who would market the stocks of the newly merged entity; f. Hiring a promoter to “hype” the virtues of the company; g. When the market reaches the high price, they would “dump” their shareholdings and bail out. FRAUDULENT TRANSACTIONS AND OTHER MARKET 7. Boiler Room Operations – involves an intensive selling campaign through numerous salesmen by telephone or through direct mail offerings for securities of MANIPULATIONS either a certain type or from a specific issuer. Investors are induced to purchase through hard-sell techniques based on unfounded predictions and mailing of misleading market letters. All 5 above (3 to 7) become illegal/unlawful if its effected to: a. Raise the price or induce the purchase of a security or of a controlling, controlled or commonly controlled company by others; b. Depresses their price to induce the sale of a security, whether of the same or of a different class, of the same issuer or of a controlling, controlled company, or commonly controlled company by others; c. Creates active trading to induce such purchase or sale through said devices or schemes. FRAUDULENT TRANSACTIONS AND OTHER MARKET 8. Circulating or Disseminating Information On Share Price Movement – involves people providing information that the price of any security listed in MANIPULATIONS 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. 9. Making False or Misleading Statements – with respect to any material fact, which he 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. 10. 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. 11. Short Sale – selling the security which the vendor does not own and borrowed only from another. This is not illegal per se but only regulated.  MANDATORY TENDER OFFER RULE MANDATORY TENDER OFFER A tender offer is anRULE offer by a person or group of persons to the stockholders of a corporation to tender their shares for purchase. Purpose: The rule on mandatory tender offer seeks 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. The mandatory tender offer rule gives the minority shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell their shares at the same price as those of the majority shareholders. MANDATORY TENDER OFFER RULE Mandatory Tender Offer: applies to any person or group of persons acting in concert, who intends to acquire: 1. 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 public company, or one: a. Whose shares are listed in an exchange; or b. Those with: i. Assets of at least P50M and ii. Having at least 200 shareholders who each have at least 100 shares. (Rule 19.2.2, 19.2.3 and 19.2.4 of the IRR of the SRC, as amended) 2. Less than 35% but will result in ownership of over 50% of the total outstanding equity securities of the public company. (Rule 19.2.5, 2015 IRR of SRC) MANDATORY TENDER OFFER RULE ILLUSTRATION: 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%) (the same ABC Corporation that owns 17% of U Corporation). A and XB agreed to sell their shares to ABC Corporation. MANDATORY TENDER OFFER RULE In this case, the mandatory tender offer rule applies to ABC Corporation. 1. ABC Corporation is acquiring 51% (more than 35%) and the resulting ownership will be 60% of X Corporation (21% + 30% + 9%) (more than 50%), thus it needs to make a tender offer to the stockholders representing the 40% (others); 2. ABC Corporation is also required to make a tender offer to the other stockholder of U Corporation (owning 23%) since X Corporation owns 60% of U Corporation, ABC will have an indirect ownership of U Corporation at the rate of 36% (60% in X Corp multiplied by the ownership of X Corp [60%] in U Corp); Accordingly, ABC Corporation will own a total of 53% of U Corporation (36% indirect ownership + 17% direct ownership), which is more than 50% ownership. (CEMCO Holdings, Inc. v. National Life Insurance Company of the Philippines, G.R. No. 171815, 7 August 2007) TRANSACTIONS EXEMPT FROM MANDATORY TENDER OFFER 1. 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; 2. Any purchase of shares from an increase in authorized capital stock. 3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where the acquisition is made by the debtor or creditor. 4. Purchases in connection with privatization undertaken by the government of the Philippines. 5. Purchases in connection with corporate rehabilitation under court supervision. 6. Purchases through an open market at the prevailing market price 7. Merger or consolidation. PROCESS OF MANDATORY TENDER OFFER REQUIREMENT 1. The offeror will make an announcement of his intention in a newspaper of general circulation, prior to the commencement of the offer; 2. At least 2 business days prior to the date of the commencement of the tender offer: a. File SEC Form 19-1 with the SEC including all exhibits thereto and pay the prescribed filing fees b. 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. 3. 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. THANK YOU SO MUCH