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Atty. Ronald S. Baquiano,CPA

Lecture Series
Special Commercial Law
RA 8799

1. Nature of RA 8799.

The SRC is termed as a “blue sky laws” enacted to protect the

public from unscrupulous promoters, who stake business or venture
claims which have no real basis, and sell shares or interests therein to
investors, who are then left holding certificates representing nothing
more than a claim to a square of the blue sky.

“ Securities transactions are impressed with public interest, and are

thus subject to public regulation.” Abacus Securities Corp. v. Ampil 483
SCRA 315 (2006)

2. What is an investment contract?

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.8

Apart from the definition, which the Implementing Rules and

Regulations provide, Philippine jurisprudence has so far not done
more to add to the same. Of course, the United States Supreme
Court, grappling with the problem, has on several occasions
discussed the nature of investment contracts. That court’s rulings,
while not binding in the Philippines, enjoy some degree of
persuasiveness insofar as they are logical and consistent with the
country’s best interests.9

The United States Supreme Court held in Securities and Exchange

Commission v. W.J. Howey Co.10 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. 11 Thus, to sustain the SEC position in this case,
PCI’s scheme or contract with its buyers must have all these
elements.

An example that comes to mind would be the long-term commercial

papers that large companies, like San Miguel Corporation (SMC),
offer to the public for raising funds that it needs for expansion.
When an investor buys these papers or securities, he invests his
money, together with others, in SMC with an expectation of profits
arising from the efforts of those who manage and operate that
company. SMC has to register these commercial papers with
the SEC before offering them to investors.

SEC v. Prosperity.Com, Inc. G.R. No. 164197 January 25, 2012

Read also: Power Homes Ultd. Corp. v. SEC 546 SCRA 567 (2008),
People v. Petralba 439 SCRA 158 (2004) “ A customer contract” is
an investment contract that falls within the definition of “securities’
under Sec. 2 of RSA..
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8
Implementing Rules and Regulations of R.A. 8799, Rule 3.1-1.
9
See Philippine Health Care Providers, Inc. v. Commissioner of Internal Revenue, G.R. No.
167330, September 18, 2009, 600 SCRA 413, 427, citing Prudential Guarantee and
Assurance, Inc. v. Trans-Asia Shipping Lines, Inc., 524 Phil. 716 (2006).
10
328 US 293 (1946).
11
See also United Housing Foundation, Inc. v. Forman, 421 US 837 (1975); Securities and
Exchange Commission v. Glen W. Turner Enterprises, Inc., 474 F. 2d 476 (1973).

3. Elements of Intra Corporate Controversy.

To determine whether a case involves an intra-corporate controversy to

be heard and decided by the RTC, two elements must concur:

(1) the status or relationship of the parties and

(2) the nature of the question that is subject of their controversy.14

The first element requires that the controversy must arise out of intra-
corporate or partnership relations: (a) between any or all of the parties
and the corporation, partnership or association of which they are
stockholders, members or associates; (b) between any or all of them
and the corporation, partnership or association of which they are
stockholders, members or associates and (c) between such
corporation, partnership or association and the State insofar as it
concerns their individual franchises. On the other hand, the second
element requires that the dispute among the parties be intrinsically
connected with the regulation of the corporation. 15 If the nature of the
controversy involves matters that are purely civil in character,
necessarily, the case does not involve an intra-corporate controversy.16

Eustacio Atwel, Lucia Pilpil and Manuel Melgazon v. Concepcion

Progressive Association Inc. G.R. no. 169370 April 14, 2008
----------------
14
Speed Distributing Corporation v. CA, 469 Phil. 739 (2004).
15
Id.
16
Id.

Q. Does SEC have jurisdiction to hear cases involving issues cognizable

by RTC?

Beyond doubt, therefore , the SEC has authority to hear cases

regardless of whether an action involves issues cognizable by the RTC,
provided the the SEC could only act upon those which are merely
administrative and regulatory in character. Roman v. SEC G.R. No.
196329 1 June 2016, 791 SCRA 638.

In other words, the SEC was never dispossessed of the power to

assume jurisdiction over complaints, even if there are riddles with
intra-corporate allegations, if their invocation of authority is confined
only to the extent of ensuring compliance with the law and the rules,
as well as to impose fines and penalties for violation thereof; and to
investigate even motu proprio whether corporations comply with the
Corporation Code, the SRC and the implementing rules and regulations.

SEC still retains sufficient powers to justify its assumption of

jurisdiction over matters concerning its supervisory, administrative and
regulatory functions. SEC v. Subic Bay Golf and Country Club and
Universal International Group Development Corporation, G.R. 179047,
March 11, 2015.
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4. What is a “salesman” of securities for purposes of the SRC’s

registration requirement?

Section 28 of SRC (RA 8799) provides that: “[n]o person shall engage
in the business of buying and selling securities in the Philippines as a
broker or dealer or act as salesman, or an associated persons of any
broker or dealer unless registered as such with the Commission”

In the case of SEC v. Oudine Santos, G.R. No. 195542, March 19, 2014
the SC held that an employee of an issuer , who provides for
information on unregistered securities offered by the latter, may be
deemed as “salesman” of such securities if such giving of information
brings about the sale of the unregistered securities.

The absence of signature in the investment contract is not a defense

as the contract merely document the act performed by the
agent/salesman.

Sec. 3. Definition of Terms.-

Xxx
3.3. “Broker” means a person engaged in the business of buying and
selling securities for the account of others.
3.4. “Dealer” means [any] person who buys [and] sells securities for
his/her own account in the ordinary course of business.

3.5. “Associated person of a broker or dealer” is an employee thereof

whom, directly exercises control of supervisory authority, but does not
include a salesman, or agent or a person whose functions are solely
clerical or ministerial.
3.13. “Salesman” is a natural person, employed as such [or] as an
agent, by a dealer, issuer, or broker to buy and sell securities.

Violation of Section 28 of the SRC consisted of the following elements:

(a) engaging the business of buying or selling of securities in the
Philippines as a broker or dealer; or
(b) acting as a salesman; or (c) acting as associated person of any
broker or dealer, unless registered as such with the SEC.

Solicitation is the act of seeking or asking for business or information;

it is not a commitment to an agreement. (Law Dictionary)

5. Who is an insider? (Sec. 3.8)

An insider may be:

(i) the issuer;

(ii) a director or officer (or person performing similar functions)
of, or a person controlling the issuer;
(iii) a person whose relationship or former relationship to the
issuer gives or gave him access to material information
about the issuer or the security that is not generally
available to the public;
(iv) a government employee, or director, or officer of an
exchange, clearing agency and /or self regulatory
organization (SRO) who has access to material information
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about an issuer or a security that it is not available to the

public; or
(v) a person who learns such information by a communication
from any of the foregoing insiders.
6. Insider trading

Section 30 of the Revised Securities Act reads:

Sec. 30. Insider's duty to disclose when trading. - (a) It shall

be unlawful for an insider to sell or buy a security of the issuer, if he
knows a fact of special significance with respect to the issuer or the
security that is not generally available, unless (1) the insider proves
that the fact is generally available or (2) if the other party to the
transaction (or his agent) is identified, (a) the insider proves that the
other party knows it, or (b) that other party in fact knows it from the
insider or otherwise.

(b) "Insider" means (1) the issuer, (2) a director or officer of, or a
person controlling, controlled by, or under common control with, the
issuer, (3) a person whose relationship or former relationship to the
issuer gives or gave him access to a fact of special significance about
the issuer or the security that is not generally available, or (4) a person
who learns such a fact from any of the foregoing insiders as defined in
this subsection, with knowledge that the person from whom he learns
the fact is such an insider.

(c) A fact is "of special significance" if (a) in addition to being material

it would be likely, on being made generally available, to affect the
market price of a security to a significant extent, or (b) a reasonable
person would consider it especially important under the circumstances
in determining his course of action in the light of such factors as the
degree of its specificity, the extent of its difference from information
generally available previously, and its nature and reliability.

(d) This section shall apply to an insider as defined in subsection (b) (3)
hereof only to the extent that he knows of a fact of special significance
by virtue of his being an insider.

The provision explains in simple terms that the insider's misuse of

nonpublic and undisclosed information is the gravamen of
illegal conduct. The intent of the law is the protection of investors
against fraud, committed when an insider, using secret information,
takes advantage of an uninformed investor. Insiders are obligated to
disclose material information to the other party or abstain from trading
the shares of his corporation. This duty to disclose or abstain is based
on two factors: first, the existence of a relationship giving access,
directly or indirectly, to information intended to be available only for a
corporate purpose and not for the personal benefit of anyone; and
second, the inherent unfairness involved when a party takes advantage
of such information knowing it is unavailable to those with whom he is
dealing.34
34
In the Matter of Cady, Roberts & Co., 40 S.E.C. 907 (1961).

SEC v. Interport Resources Corporation, G.R. No. 135808, October 6,

2008 En Banc

7. Self-Executory provisions of SRC. Sections 8, 30, and 36 of SRC do

not require the enactment of implementing rules to make them
binding and effective. SEC v. Interport Resources Corporation ,
supra.
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8. Section 6 (d) PD 902-A, “To pass upon the validity of the issuance
and use of proxies and voting trust agreements for absent
stockholders and members;

This qualification allows for a useful distinction that gives due effect to
the statutory right of the SEC to regulate proxy solicitation, and the
statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of its
rules on proxy solicitation is unquestioned when proxies are obtained
to vote on matters unrelated to the cases enumerated under Section 5
of Presidential Decree No. 902-A. However, when proxies are solicited
in relation to the election of corporate directors, the resulting
controversy, even if it ostensibly raised the violation of the SEC rules
on proxy solicitation, should be properly seen as an election
controversy within the original and exclusive jurisdiction of the trial
courts by virtue of Section 5.2 of the SRC in relation to Section 5 (c) of
Presidential Decree No. 902-A.

SEC v. CA, Omico Corporation , G.R. No. 187702 October 22, 2014,
Astra Securities Corp. v. Omico Corp.