Truth in Lending Act

Special Commercial Law
TILA, AMLA, FIA and E-Commerce Act

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I. TRUTH IN LENDING ACT (RA 3765)

A. Purpose of the Law
- To protect persons from lack of awareness of the true cost of credit and to prevent
the uninformed use of credit to the detriment of national economy.

B. Obligation of Creditors to persons to whom credit is extended
a. When does TILA apply?
o It applies to creditors who extend loans, sales on installments and other
credit transactions.

b. What are the items required to be disclosed?
i. In Credit Sales:
1. Cash price or delivered price
2. Credit for downpayment or trade-in
3. Total amount to be financed
4. Charges not incidental to the sale
5. Finance charges amount to be paid by the debtor incident to
the extension of credit such as interests, discounts, credit
investigation fees and attorneys fees
6. Percentage of the finance charges
7. Effective interest rate
8. Repayment program
9. Default or Delinquincy Charges in case of late payment

ii. In Consumer Loans:
1. Amount of credit
2. Charges
3. Amount to be financed
4. Amount of finance charge
5. Effective interest rate
6. Default or delinquency charges
7. Description of security

- Disclosure should be made prior to the consummation of the transaction and in a
clear statement in writing.

C. Covered Transactions
a. Loans, mortgages, deeds of trust, advance discounts
b. Conditional sales contracts, any contract to sell, or sale or contract of sale of
property or services, either for present or future delivery, under which part or all
of the price is payable subsequent to the making of such sale
c. Any rental-purchase contract
d. Any contract for hire, bailment or leasing of property
e. Any option, demand, lien, pledge or other claim against, or for delivery of
property or money
f. Any purchase or other acquisition of, or any credit upon the security of, any
obligation or claim arising out of the foregoing
g. Any transaction or series of transaction having a similar purpose or effect

D. Excluded Transactions
a. Those which do not involve the payment of any finance charges by the debtor
b. Transactions where the debtor is the one specifying a definite and fixed set of
credit terms such as bank deposits, insurance contracts, sale of bonds etc.

E. Consequences of non-compliance with TILA
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a. On Transaction
i. Failure to disclose: Charges not itemized cannot be collected. If already
paid, can be recovered.
ii. Willful violation of the TILA: shall not affect the validity or enforceability of
any contract or transaction (except the above)

b. On Creditor
i. Failure to disclose: Liable in the amount of Php 100 or in an amount
equal to twice the finance charged required by such creditor, whichever
is greater, however, such liability shall not exceed Php 2000 on any
credit transaction.
ii. Willful violation of TILA: shall be liable to a fine of not less than Php 1000
or more than Php 5000 or imprisonment for not less than 6 months, nor
more than 1 year or both.

F. Case laws
a. DBP vs. Arcilla
o Lawyer employed by the DBP legal department who decided to apply for a
loan under the Individual Housing Project of the bank. He alleged that the
DBP failed to furnish him with the disclosure statement as required by law.
o In the present case, DBP failed to disclose the requisite information in the
disclosure statement form authorized by the Central Bank, but did so in the
loan transaction documents between it and Arcilla. There is no evidence on
record that DBP sought to collect or collected any interest, penalty or other
charges, from Arcilla other than those disclosed in the said deeds /
documents.
o The records disclose that the required information were readily available in 3
promissory notes which were precisely executed to apprise the appellees of
the remaining balance of the credit.

b. UCPB vs. Spouses Beluso
o The promissory note which grants UCPB the power to unilaterally fix the
interest of the loan does not contain a clear statement in writing of the
finance charge expressed in terms of pesos and centavos;

II. ANTI-MONEY LAUNDERING ACT (RA 9160)

A. Policy of the Law
- To protect and preserve the integrity and confidentiality of bank accounts and to
ensure that the Philippines shall not be used as a money laundering site for the
proceeds of any unlawful activity.

B. Covered Institutions
a. Banks
b. Non-banks
c. Quasi-banks
d. Trust entities
e. All other institutions, their subsidiaries and affiliates supervised or regulated by
the BSP
f. Insurance Companies and all other institutions supervised and regulated by the
Insurance Commission
g. Securities Dealers, brokers, salesmen, investment houses and other similar
entities managing securities or rendering services as investment agent, advisor
or consultant
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h. Mutual funds, closed-end investment companies, common trust funds, pre-need
companies and other similar entities
i. Foreign exchange, corporations, money changers, money payments, remittance
and transfer companies and other entities
j. Other entities administering or otherwise dealing in currency, commodities or
financial derivatives based thereon, valuable objects, cash substitutes, and other
similar monetary instrument of property supervised or regulated by SEC.

C. Obligations of Covered Institutions
- They are mandated by the AMLA to submit covered and suspicious transaction
reports to the AMLC

D. Covered Transactions
- These are single transactions in cash or other equivalent monetary instrument
involving a total amount in excess of 500,000 within 1 banking day.
- These transactions are required to be reported to the Anti-Money Laundering
Council.

E. Suspicious Transactions
a. Regardless of amount, if any of the following is present:
i. No underlying economic, trade or legal justification
ii. Client is not properly identified (numbered accounts are allowed provided
client is identified)
iii. Transaction is not commensurate with the financial capability of the client
iv. Transaction is so structured that it cannot be reported to the AMLC
v. Transactions which deviates from the usual profile of the client
vi. Related to unlawful activity as defined by law
vii. Analogous transactions

F. When is money laundering committed
a. What is Money Laundering?
It is a crime whereby the proceeds of unlawful activity are transacted,
making them appear to have come from lawful transactions

b. It is committed by the following persons:
i. Any person knowing that the monetary instrument or property
represents, involves, or relates to the proceeds of any unlawful activity,
transacts or attempts to transact said monetary instrument or property
ii. Any person knowing that any monetary instrument or property involves
the proceeds of any unlawful activity performs or fails to perform any act
as a result of which he facilitates the offense referred to in no. 1 above.
iii. Any person knowing that any monetary instrument or property as
required under this Act to be disclosed and filed with the AMLC, fails to
do so. (Sec. 4, RA 9160 as amended)

G. Unlawful activities or Predicate Crimes
a. Predicate crimes refers to any act or omission or series or combination thereof
involving or having direct relation to the following:
i. Kidnapping for ransom
ii. Drug Trafficking and Related offenses
iii. Graft and Corrupt practices act
iv. Plunder
v. Robbery and Extortion
vi. Jueteng and Masiao
vii. Piracy
viii. Qualified theft
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ix. Swindling
x. Smuggling
xi. Violations under the E-Commerce Act
xii. Hijacking, Destructive Arson, and Murder, including those perpetrated by
terrorists against non-combatant persons and similar targets
xiii. Fraudulent practices and other violations under SRC of 2000
xiv. Felonies or offenses of similar nature that are punishable under the
penal laws of other countries.

o The crime of money laundering is separate from the unlawful activities
enumerated and requires no previous conviction for the unlawful activity.

H. Anti-money Laundering Council
a. The AMLC is created to:
i. Protect and preserve the integrity and confidentiality of bank accounts
ii. Ensure that the Philippines shall not be used as a money laundering site
for the proceeds of any unlawful activity
iii. Extend operation in trans-national investigation and prosecution of
persons involved in money laundering activities wherever committed.

I. Functions:
a. To require and receive reports of suspicious transactions
b. To issue orders addressed to the Supervising Authority or the covered
institutions
c. To institute civil forfeiture proceedings and all other remedial proceedings
through the OSG
d. To cause the filing of the complaints with the DOJ or the Ombudsman for the
prosecution of money laundering offenses
e. To investigate suspicious transactions and covered transactions deemed
suspicious
f. To apply before the CA, ex parte, for the freezing of any monetary instrument or
property alleged to be proceeds of any unlawful activity as defined in the Law
g. To implement such measures as may be necessary and justified to counteract
money laundering
h. To receive and take action in respect of any request for assistance from foreign
states in their own anti-money laundering operations
i. To enlist the assistance of any branch, department, bureau, office, agency of
instrumentality of the government, including GOCCs in undertaking any and all
anti-money laundering operations.
j. To impose administrative sanctions for the violations of the laws and the rules
k. To examine or inquire into bank deposits / investments upon order of any
competent court in cases of violation of the AMLA, when it has been established
that there is probable cause that the deposit or investment are related to an
unlawful activity.

J. Freezing of Monetary Instrument or Property
a. Who has jurisdiction for violations of AMLA?
i. RTC in all cases of money laundering
ii. Sandiganbayan those committed by public officers and private persons
in conspiracy with them.

b. Which court has jurisdiction to issue a freeze order?
It is solely the CA which has the authority to issue a freeze order
upon application ex parte by the AMLC and after determination that
probable cause exists.
It also has the exclusive jurisdiction to extend freeze orders.
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K. Authority to inquire into bank deposits
a. When may the AMLC inquire into bank deposits?

GR: only upon order of any competent court in cases of violation of RA 9160

XPN: Court order is not necessary in case of Kidnapping, Hijacking, Drugs,
Arson, Murder. (Sec. 11, RA 9160 as amended)

L. Case laws
a. Republic vs. Hon Antonio Eugenio
o Bank inquiry order and a search warrant are not the same.
o The phrase upon order of any competent court in cases of violation of this
Act the word cases should be interpreted to mean in the event that there
are violations of the AMLA, and not that there are already cases pending in
court concerning such violations. If the contrary position is adopted, the bank
inquiry order would be limited in purpose as a tool in aid of litigation of live
cases, and wholly inutile as a means for the government to ascertain whether
there is sufficient evidence to sustain an intended prosecution of the account
holder for the violation of the AMLA.
o Still, even if the bank inquiry order may be availed of without need of a pre-
existing case under the AMLA, it does not follow that such order may be
availed of ex parte.
o The Court could divine the sense in allowing ex parte proceedings under
Section 10 and in proscribing the same under Section 11. A freeze order
under Section 10 on the one hand is aimed at preserving monetary
instruments or property in any way deemed related to unlawful activities as
defined in Section 3(i) of the AMLA. The owner of such monetary instruments
or property would thus be inhibited from utilizing the same for the duration of
the freeze order. To make such freeze order anteceded by a judicial
proceeding with notice to the account holder would allow for or lead to the
dissipation of such funds even before the order could be issued.
o On the other hand, a bank inquiry order under Section 11 does not
necessitate any form of physical seizure of property of the account holder.
What the bank inquiry order authorizes is the examination of the particular
deposits or investments in banking institutions or non-bank financial
institutions. The monetary instruments or property deposited with such banks
or financial institutions are not seized in a physical sense, but are examined
on particular details such as the account holders record of deposits and
transactions. Unlike the assets subject of the freeze order, the records to be
inspected under a bank inquiry order cannot be physically seized or hidden
by the account holder. Said records are in the possession of the bank and
therefore cannot be destroyed at the instance of the account holder alone as
that would require the extraordinary cooperation and devotion of the bank.

b. Republic vs. Glasgow Credit and Collection Services
o RA 9160 as amended, and its implementing rules and regulations lay down
two conditions when applying for civil forfeiture:
When there is a suspicious transaction report or a covered
transaction report deemed suspicious after investigation by the
AMLC; and
The court has, in a petition filed for the purpose, ordered the seizure
of any monetary instrument or property, in whole or in part, directly or
indirectly, related to said report.
o A criminal conviction for an unlawful activity is not a prerequisite for the
institution of a civil forfeiture proceeding.
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III. FOREIGN INVESTMENT ACT (RA 7042)

A. Policy of the law
a. To attract and promote and welcome productive investments in activities which
significantly contribute to national industrialization and socio-economic
development to the extent that foreign investment is allowed in such activity by
the Constitution and relevant laws from foreign individuals, partnerships,
corporations, governments including their political subdivisions.
b. To encourage foreign investments in enterprises that significantly expand
livelihood and employment opportunities for Filipinos; enhance economic value of
farm products; promote the welfare of Filipino consumers; expand the scope,
quality and volume of exports and their access to foreign markets; and/or transfer
relevant technologies in agriculture, industry and support services.

B. Definition of terms:
a. Foreign Investment
Shall mean as equity investment made by a non-Philippine national
in the form of foreign exchange and/or other assets actually
transferred to the Philippines and duly registered with the Central
Bank which shall assess and appraise the value of such assets other
than foreign exchange.

b. Doing business in the Philippines
Shall include
soliciting orders,
service contracts,
opening offices, whether called liaison offices or branches;
appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country
for a period or periods totaling 180 days or more;
participating in the management, supervision or control of
any domestic business, firm, entity or corporation in the
Philippines; and
any other act or acts that imply continuity of commercial
dealings or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of some of
the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object
of the business organization.
Provided however that the phrase doing business shall not be
deemed to include:
mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or
the exercise of rights as such investor; nor
having a nominee director or officer to represent its interests
in such corporation; nor
appointing a representative or distributor domiciled in the
Philippines which transacts business in its own name and for
its own account;

c. Export Enterprises
Shall mean an enterprise which produces goods for sale, or renders
services which exports at least 60% thereof.

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d. Domestic Market Enterprise
An enterprise which fails to consistently export at least 60% of its
output.

C. Registration of Investments of non-Philippine Nationals
a. Who are Philippine Nationals?
i. Citizens of the Philippines
ii. Domestic partnership or association wholly owned by Citizens of the
Philippines
iii. Corporations organized under Philippine laws of which 60% of the capital
stock outstanding and entitled to vote are owned by Filipinos
iv. Corporations organized abroad and registered as doing business in the
Philippines under the Corporation Code of which 100% of the capital
stock entitled to vote belong to Filipinos.

b. Who are considered as non-Philippine nationals?
Those who do not belong in the definition of Philippine nationals

c. Requirements for non-Philippine nationals to do business?
Register with the SEC or with the Bureau of Trade Regulation and
Consumer Protection of the DTI in the case of single proprietorship
This can be done by non-Philippine nationals who are not
disqualified by law to do business and to invest in a domestic
enterprise enterprise up to 100% capital without the need of prior
approval.

d. Are there limitations?

GR: The SEC or BTRCP, as the case may be, shall not impose any limitations
on the extent of foreign ownership in an enterprise additional to those provided in
RA 7042.

XPNS:
That any enterprise seeking to avail of incentives under the Omnibus
Investment Code of 1987 must apply for registration with the Board
of Investments, which shall process such application for registration
in accordance with the criteria for evaluation prescribed in the said
code
That non-Philippine nationals intending to engage in the same line of
business as an existing joint venture, in which he or his majority
shareholder is a substantial partner, must disclose the fact and the
names and addresses of the partners in the existing joint venture in
his application with the SEC

D. Foreign Investments in export enterprises
a. Rules regarding foreign registration in export enterprise:
i. Foreign investments in export enterprises whose products and services
do not fall within lists A and B of the FINL is allowed up to 100%
ownership
ii. Export enterprises which are non-Philippine nationals shall register with
the BOI and submit the reports that may be required to ensure continuing
compliance with its export requirements
iii. BOI shall advice the SEC or BTRCP as the case may be, of any export
enterprise that fails to meet the export ration requirement.
iv. The SEC or BTRCP shall thereupon order the non-complying export
enterprise to reduce its sales to the domestic market to not more than
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40% of its total production; failure to comply with such order shall subject
the enterprise to cancellation of SEC or BTRCP registration, and/or the
penalties provided in the law.

- The penalties provided under the law:
o A person who violates any provision of RA 7042 or of the terms and
conditions of registration or of the rules and regulations issued pursuant
thereto, or aids or abets in any manner any violation shall be subject to a fine
not exceeding Php 100,000
o If the offense is committed by a juridical entity it shall be subject to a fine in
an amount not exceeding of 1% of the total paid in capital but not more
than Php 5,000,000. The president and/or the officials responsible therefor
shall also be subject to a fine not exceeding Php 200,000.
o In addition to the foregoing, any person, firm or juridical entity involves shall
be subject to forfeiture of all benefits granted under RA 7042.

E. Foreign Investment in Domestic Market Enterprises

o Non-Philippine nationals may own up to 100% of domestic market
enterprises unless foreign ownership therein is prohibited or limited by the
Constitution or existing laws or the FINL.

F. Foreign Investment Negative List
o It refers to the list of investment areas reserved to Philippine nationals. The
list shall have three components: List A, B and C
List A areas of activities reserved to Philippine Nationals by
mandate of the Constitution and specific laws
List B defense related activities requiring prior clearance from the
Department of National Defense (e.g. manufacture, storage, repair,
distribution of firearms, ammunitions, explosives, pyrotechnics and
similar materials)
Those that have implication on public health and morals (e.g.
manufacture and distribution of dangerous drugs, all forms of
gambling, nightclubs, bars, beer houses, dance halls, sauna
and steam bath houses, massage clinics
List C areas of investment which existing enterprises already serve
adequately the needs of the economy and the consumer and do not
require further foreign investments.

G. Case Laws
a. Hahn vs. CA
There is nothing to support the appellate courts findings that Hahn
solicited orders alone and for his own account and without
interference from BMW On the contrary, the contract shows an
agency.
An agent receives a commission upon the successful conclusion of a
sale. A broker on the other hand earns his pay by merely bringing
the buyer and the seller together, even if no sale is eventually made.
BMW is considered as doing business in the Philippines

b. Cargill vs. Intra Strata Assurance Corp.
In this case, the contract between petitioner and NMC involved the
purchase of molasses by petitioner from NMC. It was NMC, the
domestic corporation, which derived income from the transaction and
not petitioner. To constitute "doing business," the activity undertaken
in the Philippines should involve profit-making. Besides, under
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Section 3(d) of RA 7042, "soliciting purchases" has been deleted
from the enumeration of acts or activities which constitute "doing
business."
Other factors which support the finding that petitioner is not doing
business in the Philippines are: (1) petitioner does not have an office
in the Philippines; (2) petitioner imports products from the Philippines
through its non-exclusive local broker, whose authority to act on
behalf of petitioner is limited to soliciting purchases of products from
suppliers engaged in the sugar trade in the Philippines; and (3) the
local broker is an independent contractor and not an agent of
petitioner.

c. Agilent Technologies vs. Integrated Silicon
The principles regarding the right of a foreign corporation to bring
suit in the Philippine courts may thus be condensed in four
statements:
If a foreign corporation does business in the Philippines
without a license, it cannot sue before Philippine courts
If a foreign corporation is NOT doing business in the
Philippines, it needs no license to sue on an isolated
transaction or on a cause of action entirely independent of
any business transaction
If a foreign corporation does business without a license, a
Philippine citizen or entity which has contracted with said
corporation may be estopped from challenging the foreign
corporations personality before the courts
If a foreign corporation does business in the Philippines with
the required license, it can sue before Philippine courts on
any transaction.
The two tests to determine whether a foreign corporation is doing
business in the Philippines are as follows:
Substance Test whether the foreign corporation is
continuing the body of the business or enterprise for which it
was organized or has substantially retired from it.
Continuity Test continuity of commercial dealings and
arrangements.
By the clear terms of the VAASA, Agilents activities in the
Philippines were confined to (1) maintaining a stock of goods in the
Philippines solely for the purpose of having the same processed by
Integrated Silicon; and (2) consignment of equipment with Integrated
Silicon to be used in the processing of products for export. As such,
we hold that, based on the evidence presented thus far, Agilent
cannot be deemed to be "doing business" in the Philippines.
Respondents contention that Agilent lacks the legal capacity to file
suit is therefore devoid of merit. As a foreign corporation not doing
business in the Philippines, it needed no license before it can sue
before our courts.

IV. SECURITIES AND REGULATIONS CODE (RA 8799)

A. State Policy
o To establish a socially conscious, free market that regulated itself, ecourage
the widest participation of ownership in enterprises, enhance the
democratization of wealth, promote the development of the capital market,
protect investors, ensure full and fair disclosure about securities, minimize if
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not totally eliminate insider trading and other fraudulent or manipulative
devices and practices which create distortions in the free market.

Abacus Securities Corp. vs. Ruben Ampil
o Trading on credit or margin trading which was unlawfully extended.
o The United States, from which our countrys security policies are patterned,
abound with authorities explaining the main purpose of the statute on margin
requirements. This purpose is to regulate the volume of credit flow, by way of
speculative transactions, into the securities market and redirect resources
into more productive uses. Specifically, the main objective of the law on
margins is explained in this wise:
o "The main purpose of these margin provisions xxx is not to increase the
safety of security loans for lenders. Banks and brokers normally require
sufficient collateral to make themselves safe without the help of law. Nor is
the main purpose even protection of the small speculator by making it
impossible for him to spread himself too thinly although such a result will be
achieved as a byproduct of the main purpose.
o Otherwise stated, the margin requirements set out in the RSA are primarily
intended to achieve a macroeconomic purpose -- the protection of the overall
economy from excessive speculation in securities. Their recognized
secondary purpose is to protect small investors.
o The law places the burden of compliance with margin requirements primarily
upon the brokers and dealers.22 Sections 23 and 25 and Rule 25-1,
otherwise known as the "mandatory close-out rule,"23 clearly vest upon
petitioner the obligation, not just the right, to cancel or otherwise liquidate a
customers order, if payment is not received within three days from the date
of purchase. The word "shall" as opposed to the word "may," is imperative
and operates to impose a duty, which may be legally enforced. For
transactions subsequent to an unpaid order, the broker should require its
customer to deposit funds into the account sufficient to cover each purchase
transaction prior to its execution. These duties are imposed upon the broker
to ensure faithful compliance with the margin requirements of the law, which
forbids a broker from extending undue credit to a customer.
o It will be noted that trading on credit (or "margin trading") allows investors to
buy more securities than their cash position would normally allow.24
Investors pay only a portion of the purchase price of the securities; their
broker advances for them the balance of the purchase price and keeps the
securities as collateral for the advance or loan.25 Brokers take these
securities/stocks to their bank and borrow the "balance" on it, since they
have to pay in full for the traded stock. Hence, increasing margins26 i.e.,
decreasing the amounts which brokers may lend for the speculative
purchase and carrying of stocks is the most direct and effective method of
discouraging an abnormal attraction of funds into the stock market and
achieving a more balanced use of such resources.

B. Powers and Functions of the SEC:
a. Regulatory the power to promulgate rules and regulations is a legislative
recognition of the complexity of the constantly fluctuating nature of the market
and the impossibility of foreseeing all the possible contingencies that cannot be
addressed in advance.
b. Adjudicative the power to determine the rights and obligations of the parties

CEMCO Holdings vs. National Life Insurance Co.
o Cemco contends that while the SEC can take cognizance of respondents
complaint on the alleged violation by petitioner Cemco of the mandatory
tender offer requirement under Section 19 of Republic Act No. 8799, the
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same statute does not vest the SEC with jurisdiction to adjudicate and
determine the rights and obligations of the parties since, under the same
statute, the SECs authority is purely administrative. Having been vested with
purely administrative authority, the SEC can only impose administrative
sanctions such as the imposition of administrative fines, the suspension or
revocation of registrations with the SEC, and the like. Petitioner stresses that
there is nothing in the statute which authorizes the SEC to issue orders
granting affirmative relief.

Ruling:
o In taking cognizance of respondents complaint against petitioner and
eventually rendering a judgment which ordered the latter to make a tender
offer, the SEC was acting pursuant to Rule 19(13) of the Amended
Implementing Rules and Regulations of the Securities Regulation Code, to
wit:

13. Violation

If there shall be violation of this Rule by pursuing a purchase of equity shares
of a public company at threshold amounts without the required tender offer,
the Commission, upon complaint, may nullify the said acquisition and direct
the holding of a tender offer. This shall be without prejudice to the imposition
of other sanctions under the Code.

The foregoing rule emanates from the SECs power and authority to regulate,
investigate or supervise the activities of persons to ensure compliance with
the Securities Regulation Code, more specifically the provision on mandatory
tender offer under Section 19 thereof.7

Another provision of the statute, which provides the basis of Rule 19(13) of
the Amended Implementing Rules and Regulations of the Securities
Regulation Code, is Section 5.1(n), viz:

[T]he Commission shall have, among others, the following powers and
functions:

x x x x

(n) Exercise such other powers as may be provided by law as well as those
which may be implied from, or which are necessary or incidental to the
carrying out of, the express powers granted the Commission to achieve the
objectives and purposes of these laws.

The foregoing provision bestows upon the SEC the general adjudicative
power which is implied from the express powers of the Commission or which
is incidental to, or reasonably necessary to carry out, the performance of the
administrative duties entrusted to it. As a regulatory agency, it has the
incidental power to conduct hearings and render decisions fixing the rights
and obligations of the parties. In fact, to deprive the SEC of this power would
render the agency inutile, because it would become powerless to regulate
and implement the law.

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C. Securities Required to be Registered
a. Exempt Securities
i. (a) Securities 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.

ii. (b) 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 Commission may require compliance with the form
and content for disclosures the Commission may prescribe.

iii. (c) Certificates issued by a receiver or by a trustee in bankruptcy duly
approved by the proper adjudicatory body.

iv. (d) 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.

v. (e) Any security issued by a bank except its own shares of stock.

b. Exempt Transactions (Sec. 10)
The requirement of registration shall not apply to the sale of any security in any
of the following transactions:
i. (a) At any judicial sale, sale by executor, administrator, guardian or
receiver or trustee in insolvency of bankruptcy
ii. (b) 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
this Code, to liquidate a bonafide debt, a security pledged in good faith
as security for such debt.
iii. (c) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner therefore, or by his representative
for the owners 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.
iv. (d) 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.
v. (e) 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.
vi. (f) 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
vii. (g) 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
this Code or was, when sold, exempt from the provision of this Code,
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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 this Code. 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.
viii. (h) Brokers transaction, executed upon customers orders, on any
registered Exchange or other trading market.
ix. (i) 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.
x. (j) 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.
xi. (k) The sale of securities by an issuer to fewer than twenty (20) persons
in the Philippines during any twelve-month period.gle sale.
xii. (l) The sale of securities to any number of qualified buyers:
1. Bank
2. Registered Investment House
3. Insurance Company
4. 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
5. Investment Company
6. Such other person as the Commission 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.

SEC vs. Prosperity.com
o The Securities Regulation Code treats investment contracts as securities
that have to be registered with the SEC before they can be distributed and
sold. An investment contract is a contract, transaction, or scheme where a
person invests his money in a common enterprise and is led to expect profits
primarily from the efforts of others.
o The United States Supreme Court held in Securities and Exchange
Commission v. W.J. Howey Co. that, for an investment contract to exist, the
following elements, referred to as the Howey test must concur: (1) a contract,
transaction, or scheme; (2) an investment of money; (3) investment is made
in a common enterprise; (4) expectation of profits; and (5) profits arising
primarily from the efforts of others. Thus, to sustain the SEC position in this
case, PCIs scheme or contract with its buyers must have all these elements.
o Actually, PCI appears to be engaged in network marketing, a scheme
adopted by companies for getting people to buy their products outside the
usual retail system where products are bought from the stores shelf. Under
this scheme, adopted by most health product distributors, the buyer can
become a down-line seller. The latter earns commissions from purchases
made by new buyers whom he refers to the person who sold the product to
him. The network goes down the line where the orders to buy come.
14

o The commissions, interest in real estate, and insurance coverage worth
P50,000.00 are incentives to down-line sellers to bring in other customers.
These can hardly be regarded as profits from investment of money under the
Howey test.

Power Homes Unlimited Corp. vs. SEC
The second issue is whether the business of petitioner involves an investment contract
that is considered security
11
and thus, must be registered prior to sale or offer for sale or
distribution to the public pursuant to Section 8.1 of R.A. No. 8799, viz:
Section 8. Requirement of Registration of Securities. 8.1. 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. 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.
Public respondent SEC found the petitioner "as a marketing company that promotes and
facilitates sales of real properties and other related products of real estate developers
through effective leverage marketing." It also described the conduct of petitioners
business as follows:
The scheme of the [petitioner] corporation requires an investor to become a
Business Center Owner (BCO) who must fill-up and sign its application form. The
Terms and Conditions printed at the back of the application form indicate that the
BCO shall mean an independent representative of Power Homes, who is enrolled
in the companys referral program and who will ultimately purchase real property
from any accredited real estate developers and as such he is entitled to a referral
bonus/commission. Paragraph 5 of the same indicates that there exists no
employer/employee relationship between the BCO and the Power Homes
Unlimited, Corp.
The BCO is required to pay US$234 as his enrollment fee. His enrollment entitles
him to recruit two investors who should pay US$234 each and out of which
amount he shall receive US$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 after
deducting the amount of US$36.80 as property fund from the gross amount of
US$184. After recruiting 128 persons in a period of eight (8) months for each Left
and Right business groups or a total of 256 enrollees whether directly referred by
the BCO or through his down lines, the BCO who receives a total amount of
US$11,412.80 after deducting the amount of US$363.20 as property fund from
the gross amount of US$11,776, has now an accumulated amount of US$2,700
constituting as his Property Fund placed in a Property Fund account with the
Chinabank. This accumulated amount of US$2,700 is used as partial/full down
payment for the real property chosen by the BCO from any of [petitioners]
accredited real estate developers.
12

An investment contract is defined in the Amended Implementing Rules and Regulations
of R.A. No. 8799 as a "contract, transaction or scheme (collectively contract) whereby a
person invests his money in a common enterprise and is led to expect
profits primarily from the efforts of others."
13

15

It behooves us to trace the history of the concept of an investment contract under R.A.
No. 8799. Our definition of an investment contract traces its roots from the 1946 United
States (US) case of SEC v. W.J. Howey Co.
14
In this case, the US Supreme Court was
confronted with the issue of whether the Howey transaction constituted an "investment
contract" under the Securities Acts definition of "security."
15
The US Supreme Court,
recognizing that the term "investment contract" was not defined by the Act or illumined by
any legislative report,
16
held that "Congress was using a term whose meaning had been
crystallized"
17
under the states "blue sky" laws
18
in existence prior to the adoption of the
Securities Act.
19
Thus, it ruled that the use of the catch-all term "investment contract"
indicated a congressional intent to cover a wide range of investment transactions.
20
It
established a test to determine whether a transaction falls within the scope of an
"investment contract."
21
Known as the Howey Test, it requires a transaction, contract, or
scheme whereby a person (1) makes an investment of money, (2) in a common
enterprise, (3) with the expectation of profits, (4) to be derived solely from the efforts of
others.
22
Although the proponents must establish all four elements, the US Supreme
Court stressed that the Howey Test "embodies a flexible rather than a static principle,
one that is capable of adaptation to meet the countless and variable schemes devised by
those who seek the use of the money of others on the promise of profits."
23
Needless to
state, any investment contract covered by the Howey Test must be registered under the
Securities Act, regardless of whether its issuer was engaged in fraudulent practices.
After Howey came the 1973 US case of SEC v. Glenn W. Turner Enterprises, Inc. et
al.
24
In this case, the 9
th
Circuit of the US Court of Appeals ruled that the element that
profits must come "solely" from the efforts of others should not be given a strict
interpretation. It held that a literal reading of the requirement "solely" would lead to
unrealistic results. It reasoned out that its flexible reading is in accord with the statutory
policy of affording broad protection to the public. Our R.A. No. 8799 appears to follow this
flexible concept for it defines an investment contract as a contract, transaction or scheme
(collectively "contract") whereby a person invests his money in a common enterprise
and is led to expect profits not solely but primarily from the efforts of others. Thus,
to be a security subject to regulation by the SEC, an investment contract in our
jurisdiction must be proved to be: (1) an investment of money, (2) in a common
enterprise, (3) with expectation of profits, (4) primarily from efforts of others.
Prescinding from these premises, we affirm the ruling of the public respondent SEC and
the Court of Appeals that the petitioner was engaged in the sale or distribution of an
investment contract. Interestingly, the facts of SEC v. Turner
25
are similar to the case at
bar. In Turner, the SEC brought a suit to enjoin the violation of federal securities laws by
a company offering to sell to the public contracts characterized as self-improvement
courses. On appeal from a grant of preliminary injunction, the US Court of Appeals of the
9
th
Circuit held that self-improvement contracts which primarily offered the buyer the
opportunity of earning commissions on the sale of contracts to others were "investment
contracts" and thus were "securities" within the meaning of the federal securities laws.
This is regardless of the fact that buyers, in addition to investing money needed to
purchase the contract, were obliged to contribute their own efforts in finding prospects
and bringing them to sales meetings. The appellate court held:
It is apparent from the record that what is sold is not of the usual "business
motivation" type of courses. Rather, the purchaser is really buying the
possibility of deriving money from the sale of the plans by Dare to
individuals whom the purchaser has brought to Dare. The promotional aspects of
the plan, such as seminars, films, and records, are aimed at interesting others in
the Plans. Their value for any other purpose is, to put it mildly, minimal.
16

Once an individual has purchased a Plan, he turns his efforts toward
bringing others into the organization, for which he will receive a part of
what they pay. His task is to bring prospective purchasers to "Adventure
Meetings."
The business scheme of petitioner in the case at bar is essentially similar. An investor
enrolls in petitioners program by paying US$234. This entitles him to recruit two (2)
investors who pay US$234 each and out of which amount he receives US$92. A
minimum recruitment of four (4) investors by these two (2) recruits, who then recruit at
least two (2) each, entitles the principal investor to US$184 and the pyramid goes on.
We reject petitioners claim that the payment of US$234 is for the seminars on leverage
marketing and not for any product. Clearly, the trainings or seminars are merely designed
to enhance petitioners business of teaching its investors the know-how of its multi-level
marketing business. An investor enrolls under the scheme of petitioner to be entitled to
recruit other investors and to receive commissions from the investments of those directly
recruited by him. Under the scheme, the accumulated amount received by the investor
comes primarily from the efforts of his recruits.
We therefore rule that the business operation or the scheme of petitioner constitutes an
investment contract that is a security under R.A. No. 8799. Thus, it must be registered
with public respondent SEC before its sale or offer for sale or distribution to the public. As
petitioner failed to register the same, its offering to the public was rightfully enjoined by
public respondent SEC. The CDO was proper even without a finding of fraud. As an
investment contract that is security under R.A. No. 8799, it must be registered with public
respondent SEC, otherwise the SEC cannot protect the investing public from fraudulent
securities. The strict regulation of securities is founded on the premise that the capital
markets depend on the investing publics level of confidence in the system.

D. Procedure for Registration of Securities
a. Application for Registration
All securities required to be registered shall be registered through the
filing by the issuer a sworn registration statement, containing such
information as the Commission shall prescribe.
b. Other Information
Other information may be asked or the Commission may dispense
with such requirement depending on their necessity or their
applicability to the class of securities sought to be registered (e.g.
effect of the securities issue on ownership, the mix of ownership
especially foreign and local ownership)
c. Signature and Written Consent
The written statement shall be signed by the issuers executive
officer or persons performing similar functions duly authorized by the
Board of Directors.
d. Filing fees
Upon the filing of the registration statement, the issuer shall pay the
Commission a fee of not more than 1/10 of 1 per centum of the
maximum aggregate price at which such securities are proposed to
be offered.
e. Notice and Publication
Publication shall be made by the issuer at its own expense, in 2
newspapers of general circulation in the Philippines, once a week for
2 consecutive weeks.
f. Declaration of Effectivity
17

The Commission shall declare the registration statement effective or
rejected within 45 days after the date of filing, or by such a later date
to which the issuer has consented.
g. Statement under oath.
Upon effectivity of the registration statement, the issuer shall state
under oath in every prospectus that all requirements have been met
and that all information are true and correct as represented by the
issuer. (Any untrue statement shall constitute fraud)

E. Prohibitions on Fraud, Manipulation and Insider Trading
a. Manipulation of Security Prices
b. Short Sales
c. Fraudulent Transactions
d. Insider Trading

F. Protection of Investors
a. Tender Offer Rule
b. Rules on Proxy Solicitation
c. Disclosure Rule

V. E-COMMERCE ACT (RA 8792)

A. State Policy
o The State recognizes the vital role of information and communications
technology (ICT) in nation-building;
o the need to create an information-friendly environment which supports and
ensures the availability, diversity and affordability of ICT products and
services;
o the primary responsibility of the private sector in contributing investments and
services in telecommunications and information technology;
o the need to develop, with appropriate training programs and institutional
policy changes, human resources for the information technology age, a labor
force skilled in the use of ICT and a population capable of operating and
utilizing electronic appliances and computers;
o its obligation to facilitate the transfer and promotion of technology; to ensure
network security, connectivity and neutrality of technology for the national
benefit; and
o the need to marshal, organize and deploy national information
infrastructures, comprising in both telecommunications network and strategic
information services, including their interconnection to the global information
networks, with the necessary and appropriate legal, financial, diplomatic and
technical framework, systems and facilities.

B. Objective
o This Act aims to facilitate domestic and international dealings, transactions,
arrangements agreements, contracts and exchanges and storage of
information through the utilization of electronic, optical and similar medium,
mode, instrumentality and technology to recognize the authenticity and
reliability of electronic documents related to such activities and to promote
the universal use of electronic transaction in the government and general
public.

C. Coverage
a. Electronic Data Message
Refers to information generated, sent, received, or stored by
electronic, optical or similar means.
18

b. Electronic Signature
refers to any distinctive mark, characteristic and/or sound in
electronic form, representing the identity of a person and attached to
or logically associated with the electronic data message or electronic
document or any methodology or procedures employed or adopted
by a person and executed or adopted by such person with the
intention of authenticating or approving an electronic data message
or electronic document.

c. Electronic Document
refers to information or the representation of information, data,
figures, symbols or other modes of written expression, described or
however represented, by which a right is established or an obligation
extinguished, or by which a fact may be prove and affirmed, which is
receive, recorded, transmitted, stored, processed, retrieved or
produced electronically.

d. Electronic Key
refers to a secret code which secures and defends sensitive
information that cross over public channels into a form decipherable
only with a matching electronic key.

D. Legal Recognition

Section 6. Legal Recognition of Electronic Data Messages - Information shall not be
denied legal effect, validity or enforceability solely on the grounds that it is in the data
message purporting to give rise to such legal effect, or that it is merely referred to in that
electronic data message.

Section 7. Legal Recognition of Electronic Documents - Electronic documents shall have
the legal effect, validity or enforceability as any other document or legal writing, and -

(a) Where the law requires a document to be in writing, that requirement is met
by an electronic document if the said electronic document maintains its integrity
and reliability and can be authenticated so as to be usable for subsequent
reference, in that -

i. The electronic document has remained complete and unaltered, apart
from the addition of any endorsement and any authorized change, or any
change which arises in the normal course of communication, storage and
display; and

ii. The electronic document is reliable in the light of the purpose for which
it was generated and in the light of all relevant circumstances.

(b) Paragraph (a) applies whether the requirement therein is in the form of an
obligation or whether the law simply provides consequences for the document
not being presented or retained in its original from.

(c) Where the law requires that a document be presented or retained in its
original form, that requirement is met by an electronic document if -

i. There exists a reliable assurance as to the integrity of the document
from the time when it was first generated in its final form; and

19

ii. That document is capable of being displayed to the person to whom it
is to be presented: Provided, That no provision of this Act shall apply to
vary any and all requirements of existing laws on formalities required in
the execution of documents for their validity.

For evidentiary purposes, an electronic document shall be the functional
equivalent of a written document under existing laws.

This Act does not modify any statutory rule relating to admissibility of electronic
data massages or electronic documents, except the rules relating to
authentication and best evidence.

Section 8. Legal Recognition of Electronic Signatures. - An electronic signature on the
electronic document shall be equivalent to the signature of a person on a written
document if that signature is proved by showing that a prescribed procedure, not
alterable by the parties interested in the electronic document, existed under which -

(a) A method is used to identify the party sought to be bound and to indicate said
party's access to the electronic document necessary for his consent or approval
through the electronic signature;

(b) Said method is reliable and appropriate for the purpose for which the
electronic document was generated or communicated, in the light of all
circumstances, including any relevant agreement;

(c) It is necessary for the party sought to be bound, in or order to proceed further
with the transaction, to have executed or provided the electronic signature; and

(d) The other party is authorized and enabled to verify the electronic signature
and to make the decision to proceed with the transaction authenticated by the
same.

Section 9. Presumption Relating to Electronic Signatures - In any proceedings involving
an electronic signature, it shall be presumed that -

(a) The electronic signature is the signature of the person to whom it correlates;
and

(b) The electronic signature was affixed by that person with the intention of
signing or approving the electronic document unless the person relying on the
electronically signed electronic document knows or has noticed of defects in or
unreliability of the signature or reliance on the electronic signature is not
reasonable under the circumstances.

E. Admissibility and Evidentiary Weight

Section 12. Admissibility and Evidential Weight of Electronic Data Message or Electronic
Document. - In any legal proceedings, nothing in the application of the rules on evidence
shall deny the admissibility of an electronic data message or electronic document in
evidence -

(a) On the sole ground that it is in electronic form; or

(b) On the ground that it is not in the standard written form, and the electronic
data message or electronic document meeting, and complying with the
20

requirements under Sections 6 or 7 hereof shall be the best evidence of the
agreement and transaction contained therein.

In assessing the evidential weight of an electronic data message or electronic document,
the reliability of the manner in which it was generated, stored or communicated, the
reliability of the manner in which its originator was identified, and other relevant factors
shall be given due regard.

F. Electronic Contracts

Section 16. Formation of Validity of Electronic Contracts.

(1) Except as otherwise agreed by the parties, an offer, the acceptance of an
offer and such other elements required under existing laws for the formation of
contracts may be expressed in, demonstrated and proved by means of electronic
data messages or electronic documents and no contract shall be denied validity
or enforceability on the sole ground that it is in the form of an electronic data
message or electronic document, or that any or all of the elements required
under existing laws for the formation of contracts is expressed, demonstrated
and proved by means of electronic data messages or electronic documents.

(2) Electronic transactions made through networking among banks, or linkages
thereof with other entities or networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or the debit of one account
and the corresponding credit to another, whether such transaction is initiated by
the depositor or by an authorized collecting party: Provided, that the obligation of
one bank, entity, or person similarly situated to another arising therefrom shall be
considered absolute and shall not be subjected to the process of preference of
credits.

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TILA, AMLA, FIA and E-Commerce Act

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