1. PHILIPPINE VETERANS BANK vs.

JUSTINA CALLANGAN

G.R. No. 191995 AUGUST 3, 2011 J. BRION

The Supreme Court held that “public company,” as contemplated by

the Securities Regulation Code (SRC), is not limited to a company

whose shares of stocks are publicly listed; even companies like the

Philippine Veterans Bank, whose shares are offered only to a

specific group of people, are considered a public company, provided

they meet the requirement as required under the SRC.

FACTS:

Justina F. Callangan, the Director of the Corporation Finance

Department of the Securities and Exchange Commission (SEC),

sent the Philippine Veterans Bank (Bank) a letter, informing it that it

qualifies as a “public company” under Section 17.2 of the Securities

Regulation Code (SRC) in relation with Rule 3(1)(m) of the Amended

Implementing Rules and Regulations of the SRC. The Bank is thus

required to comply with the reportorial requirements set forth in

Section 17.1 of the SRC.

The Bank responded by explaining that it should not be considered a

“public company” because it is a private company whose shares of

stock are available only to a limited class or sector, i.e., to World War

II veterans, and not to the general public. In a

letter, Director Callangan rejected the Bank’s explanation and

assessed it with a penalty for failing to comply with the SRC

reportorial requirements.

ISSUE:

Whether or not the reportorial requirements of the SEC are

applicable to banks.

HELD:

YES. The Securities and Exchange Commission (SEC) required

the Philippine Veterans Bank (Bank) to comply with the reportorial

requirements under Section 17.1 of SRC since it qualifies as a “public

company” under Section 17.2 of the SRC. The Bank argued that it is

a private company and not a public company because its shares are

available only to a limited class or sector. The Supreme Court held

that “public company,” as contemplated by the Securities

Regulation Code (SRC), is not limited to a company whose shares of

stocks are publicly listed; even companies like the Bank, whose

shares are offered only to a specific group of people, are considered

a public company, provided they meet the requirement as required

under the SRC.

To determine whether the Bank is a "public company" burdened with

the reportorial requirements ordered by the SEC, we look to

Subsections 17.1 and 17.2 of the SRC, which provide:

Section 17. Periodic and Other Reports of Issuers. –

17.1. Every issuer satisfying the requirements in Subsection 17.2

hereof shall file with the Commission:

a) Within one hundred thirty-five (135) days, after the end of the

issuer’s fiscal year, or such other time as the Commission may

prescribe, an annual report which shall include, among others, a

balance sheet, profit and loss statement and statement of cash

flows, for such last fiscal year, certified by an independent

certified public accountant, and a management discussion and

analysis of results of operations; and

b) Such other periodical reports for interim fiscal periods and

current reports on significant developments of the issuer as the

Commission may prescribe as necessary to keep current

information on the operation of the business and financial

condition of the issuer.

17.2. The reportorial requirements of Subsection 17.1 shall apply to

the following:

xxxx
c) An issuer with assets of at least Fifty million pesos

(₱ 50,000,000.00) or such other amount as the Commission shall

prescribe, and having two hundred (200) or more holders each

holding at least one hundred (100) shares of a class of its equity

securities: Provided, however, That the obligation of such issuer to

file reports shall be terminated ninety (90) days after notification to

the Commission by the issuer that the number of its holders holding

at least one hundred (100) shares is reduced to less than one

hundred (100).

We also cite Rule 3(1)(m) of the Amended Implementing Rules and

Regulations of the SRC, which defines a "public company" as "any

corporation with a class of equity securities listed on an

Exchange or with assets in excess of Fifty Million

Pesos (₱ 50,000,000.00) and having two hundred (200) or more

holders, at least two hundred (200) of which are holding at least

one hundred (100) shares of a class of its equity securities."

From these provisions, it is clear that a "public company," as

contemplated by the SRC, is not limited to a company whose shares

of stock are publicly listed; even companies like the Bank, whose

shares are offered only to a specific group of people, are considered

a public company, provided they meet the requirements enumerated

above.
The records establish, and the Bank does not dispute, that the Bank

has assets exceeding ₱ 50,000,000.00 and has 395,998

shareholders. It is thus considered a public company that must

comply with the reportorial requirements set forth in Section 17.1 of

the SRC.

3.UNION BANK OF THE PHILIPPINES vs. SECURITIES and EXCHANGE COMMISSION

G.R. No. 138949 June 6, 2001 PANGANIBAN, J.:

The mere fact that petitioner, in regard to its banking functions, is

already subject to the supervision of

the Bangko Sentral ng Pilipinas does not exempt the former from

reasonable disclosure regulations issued by the Securities and

Exchange Commission (SEC). These regulations -- imposed on

petitioner as a banking institution listed in the stock market -- are

meant to assure full, fair and accurate information for the protection

of investors. Imposing such regulations is a function within the

jurisdiction of the SEC.

Facts: Union Bank sought the opinion of SEC as to the applicability

and coverage of the Full Material Disclosure Rule on banks,

contending that said rules, in effect, amend Section 5 (a) (3) of the

Revised Securities Act which exempts securities issued or

guaranteed by banking institutions from the registration

requirement. It argued that its securities are exempt from the

registration requirements under Section 5(a)(3) of the

Revised Securities Act. Petitioner also argued that it is not covered

by RSA Implementing Rules, to wit:

! Rule 11(a)-1, which requires the filing of annual, quarterly,

current predecessor and successor reports;

! Rule 34(a)-1, which mandates the filing of proxy statements

and forms of proxy;

! Rule 34(c)-1, which obligates the submission of information

statements.

SEC maintains that while the requirements of registration do not

apply to securities of banks, banks with a class of securities listed

for trading on the Philippine Stock Exchange, Inc., they are covered

by certain Revised Securities Act Rules governing the filing of

various reports.

Unionbank was fined for failure for failure to file SEC Form 11-A. CA

affirmed the decision of SEC.

Issue: Whether the RSA Implementing Rules 11(a)-1, 34(a)-1 and

34(c)-1 applies to Union Bank.

Ruling: Yes. Section 5(a)(3) of RSA exempts from registration

the securities issued by banking or financial institutions. Nowhere

does it state or even imply that petitioner, as a listed corporation, is

exempt from complying with the reports required by the assailed

RSA Implementing Rules. The exemption from the registration

requirement enjoyed by petitioner does not necessarily connote that

it is exempted from the other reportorial requirements.

The full disclosure Rules do not amend Section 5(a)(3) of the

Revised Securities Act, because they do not revoke or amend the

exemption from registration of the securities enumerated. They are

reasonable regulations imposed upon petitioner as a banking

corporation trading its securities in the stock market.

The mere fact that in regard to its banking functions, petitioner is

already subject to the supervision of the BSP does not exempt the

former from reasonable disclosure regulations issued by

the SEC. These regulations are meant to assure full, fair and

accurate disclosure of information for the protection of investors in

the stock market. Imposing such regulations is a function within the

jurisdiction of the SEC.

4. BAVIERA vs. PAGLINAWAN

G.R. No. 168380 FEBRUARY 08, 2007 J. SANDOVAL-GUTIERREZ

A criminal charge for violation of the Securities Regulation Code is a

specialized dispute. Hence, it must first be referred to an

administrative agency of special competence, i.e., the SEC. Under

the doctrine of primary jurisdiction, courts will not determine a

controversy involving a question within the jurisdiction of the

administrative tribunal, where the question demands the exercise of

sound administrative discretion requiring the specialized knowledge

and expertise of said administrative tribunal to determine technical

and intricate matters of fact.

FACTS:

Standard Chartered Bank (SCB) acted as a stock broker, soliciting

from local residents foreign securities called Global Third Party

Mutual Fund (GTPMF). These securities were not registered with the

SEC and were then remitted outwardly to SCB-Hong Kong and

SCB-Singapore. The Investment Capital Association of the

Philippines (ICAP) filed with the Securities and Exchange

Commission (SEC) a complaint alleging that SCB violated the

Revised Securities Act, particularly the provision prohibiting the

selling of securities without prior registration with the SEC; and that

its actions are potentially damaging to the local mutual fund industry.
Notwithstanding the BangkoSentral ng Pilipinas (BSP) directive,

SCB continued to offer and sell GTPMF securities in this country.

Petitioner learned that the SCB had been prohibited by the BSP to

sell GPTMF securities. Petitioner filed with the Department of

Justice (DOJ) a complaint for violation of Section 8.1 of the

Securities Regulation Code against private respondents but was

denied holding that it should have been filed with the SEC.

ISSUE:

Whether the SEC has jurisdiction over the case.

HELD:

YES. A criminal charge for violation of the Securities Regulation

Code is a specialized dispute. Hence, it must first be referred to an

administrative agency of special competence, i.e., the SEC. Under

the doctrine of primary jurisdiction, courts will not determine a

controversy involving a question within the jurisdiction of the

administrative tribunal, where the question demands the exercise of

sound administrative discretion requiring the specialized knowledge

and expertise of said administrative tribunal to determine technical

and intricate matters of fact. The Securities Regulation Code is a

special law. Its enforcement is particularly vested in the SEC. Hence,

all complaints for any violation of the Code and its implementing
rules and regulations should be filed with the SEC. Where the

complaint is criminal in nature, the SEC shall indorse the complaint

to the DOJ for preliminary investigation and prosecution.

5. PHILIPPINE STOCK EXCHANGE, INC. v. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION

and PUERTO AZUL LAND, INC.

G.R. No. 125469 October 27, 1997 J. TORRES, JR.

The principal function of the SEC is the supervision and control over corporations, partnerships and associations

with the end in view that investment in these entities may be encouraged and protected, and their activities for the

promotion of economic development.

Philippine Stock Exchange (PSE) is not an ordinary corporation, in that although it is clothed with the markings of

a corporate entity, it functions as the primary channel through which the vessels of capital trade ply. As the only

operational stock exchange in the country today, the PSE enjoys a monopoly of securities transactions, and as such,

it yields an immense influence upon the country’s economy.

Section 3 of P.D. 902-A or the “Revised Securities Act” gives the Securities Exchange Commission (SEC)

supervision and control over the affairs of stock exchanges so that the interests of the investing public may be fully

safeguarded through fair dealing in securities and fair administration of such exchange.

FACTS

Puerto Azul Land, Inc. (PALI) is a domestic real estate corporation, had sought to offer its shares to the public

in order to raise funds allegedly to develop its properties and pay its loans with several banking institutions. In

January, 1995, PALI was issued a Permit to Sell its shares to the public by the Securities and Exchange Commission

(SEC). To facilitate the trading of its shares among investors, PALI sought to course the trading of its shares

through the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock exchange an

application to list its shares, with supporting documents attached.

The PSE Listing Committee recommended to the PSE’s Board of Governers the approval of PALI’s listing

application. Before the latter acted upon it, they received a letter from the heirs of Ferdinand E. Marcos, claiming

that the late President Marcos was the legal and beneficial owner of certain properties forming part of the Puerto

Azul Beach Hotel and Resort Complex which PALI claims to be among its assets and that the Ternate Development

Corporation, which is among the stockholders of PALI, likewise appears to have been held and continue to be held

in trust by one Rebecco Panlilio for then President Marcos and now, effectively for his estate, and requested PALI's

application to be deferred.

PALI argues that the properties of Puerto Azul Beach Hotel and Resort Complex were not claimed by PALI as its

assets since the resort is actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities
distinct from PALI. Further, the Ternate Development Corporation owns only 1.20% of PALI. The Marcoses response

was a claim on the legal and beneficial ownership of other properties titled under PALI and not only said facilities of

the Puerto Azul Hotel and Resort Complex.

Since the subject properties were under sequestration of the Presidential Commission on Good Governance

(PCGG), RTC Pasig issued a Temporary Restraining Order (TRO) enjoining the Marcoses from interfering with the

approval of the of the initial public offering of PALI.

The PSE denied PALI’s application on the ground of serious claims, issues and circumstances surrounding

PALI’s ownerhip over its assets that adversely affect the suitability of listing PALI’s shares in the stock exchange.

Upon appeal to the SEC, it reveresed the PSE decision under Section 3, in conjunction with Sections 3, 6(j) and 6(m)

of the Revised Securities Act (P.D. 902-A). With the Court of Appeals (CA), the appeal was dismissed. Hence, this

petition.

ISSUES

1. Whether or not SEC’s regulatory authority extends, particularly, with regard to the PSE.
2. Whether the PSE was correct in allowing the listing and sales of the PALI shares.

HELD
1. YES. It is undeniable that the petitioner PSE is not an ordinary corporation, in that although it is clothed
with the markings of a corporate entity, it functions as the primary channel through which the vessels of
capital trade ply. The PSE's relevance to the continued operation and filtration of the securities transactions
in the country gives it a distinct color of importance such that government intervention in its affairs
becomes justified, if not necessarily. Indeed, as the only operational stock exchange in the country today,
the PSE enjoys a monopoly of securities transactions, and as such, it yields an immense influence upon the
country's economy.

Due to this special nature of stock exchanges, the country's lawmakers has seen it wise to give

special treatment to the administration and regulation of stock exchanges.

These provisions, read together with the general grant of jurisdiction, and right of supervision and

control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the special mandate to be vigilant in

the supervision of the affairs of stock exchanges so that the interests of the investing public may be fully

safeguard.

Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold the SEC's

challenged control authority over the petitioner PSE even as it provides that "the Commission shall have

absolute jurisdiction, supervision, and control over all corporations, partnerships or associations, who are

the grantees of primary franchises and/or a license or permit issued by the government to operate in the

Philippines. . ." The SEC's regulatory authority over private corporations encompasses a wide margin of

areas, touching nearly all of a corporation's concerns. This authority springs from the fact that a corporation

owes its existence to the concession of its corporate franchise from the state.

The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or be

considered as necessary or incidental to the carrying out of the SEC's express power to insure fair dealing
in securities traded upon a stock exchange or to ensure the fair administration of such exchange. It is,

likewise, observed that the principal function of the SEC is the supervision and control over corporations,

partnerships and associations with the end in view that investment in these entities may be encouraged and

protected, and their activities for the promotion of economic development.

This is not to say, however, that the PSE's management prerogatives are under the absolute control

of the SEC. The PSE is, alter all, a corporation authorized by its corporate franchise to engage in its

proposed and duly approved business. One of the PSE's main concerns, as such, is still the generation of

profit for its stockholders. Moreover, the PSE has all the rights pertaining to corporations, including the right

to sue and be sued, to hold property in its own name, to enter (or not to enter) into contracts with third

persons, and to perform all other legal acts within its allocated express or implied powers.

A corporation is but an association of individuals, allowed to transact under an assumed corporate

name, and with a distinct legal personality. In organizing itself as a collective body, it waives no constitutional

immunities and perquisites appropriate to such a body. As to its corporate and management decisions,

therefore, the state will generally not interfere with the same. Questions of policy and of management are

left to the honest decision of the officers and directors of a corporation, and the courts are without

authority to substitute their judgment for the judgment of the board of directors. The board is the business

manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.

Thus, notwithstanding the regulatory power of the SEC over the PSE, and the resultant authority to

reverse the PSE's decision in matters of application for listing in the market, the SEC may exercise such

power only if the PSE's judgment is attended by bad faith. In Board of Liquidators vs. Kalaw, it was held

that bad faith does not simply connote bad judgment or negligence. It imports a dishonest purpose or some

moral obliquity and conscious doing of wrong. It means a breach of a known duty through some motive or

interest of ill will, partaking of the nature of fraud.

In reaching its decision to deny the application for listing of PALI, the PSE considered important

facts, which, in the general scheme, brings to serious question the qualification of PALI to sell its shares to

the public through the stock exchange. During the time for receiving objections to the application, the PSE

heard from the representative of the late President Ferdinand E. Marcos and his family who claim the

properties of the private respondent to be part of the Marcos estate. In time, the PCGG confirmed this claim.

In fact, an order of sequestration has been issued covering the properties of PALI, and suit for reconveyance

to the state has been filed in the Sandiganbayan Court. How the properties were effectively transferred,

despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and to the private respondent

PALI, in only a short span of time, are not yet explained to the Court, but it is clear that such circumstances

give rise to serious doubt as to the integrity of PALI as a stock issuer. The petitioner was in the right when

it refused application of PALI, for a contrary ruling was not to the best interest of the general public. The

purpose of the Revised Securities Act, after all, is to give adequate and effective protection to the investing

public against fraudulent representations, or false promises, and the imposition of worthless ventures.

2. NO. The true ownership of the properties of PALI need not be determined as an absolute fact. What is
material is that the uncertainty of the properties' ownership and alienability exists, and this puts to question
the qualification of PALI's public offering. In sum, the Court finds that the SEC had acted arbitrarily in
arrogating unto itself the discretion of approving the application for listing in the PSE of the private
respondent PALI, since this is a matter addressed to the sound discretion of the PSE, a corporation entity,
whose business judgments are respected in the absence of bad faith.
 Section 3 of the Revised Securities Act, gives the SEC the power to promulgate such rules and

regulations as it may consider appropriate in the public interest for the enforcement of the said laws. The

second paragraph of Section 4 of the said law, on the other hand, provides that no security, unless exempt

by law, shall be issued, endorsed, sold, transferred or in any other manner conveyed to the public, unless

registered in accordance with the rules and regulations that shall be promulgated in the public interest and

for the protection of investors by the Commission. Presidential Decree No. 902-A, on the other hand,

provides that the SEC, as regulatory agency, has supervision and control over all corporations and over the

securities market as a whole, and as such, is given ample authority in determining appropriate policies.

Pursuant to this regulatory authority, the SEC has manifested that it has adopted the policy of "full material

disclosure"where all companies, listed or applying for listing, are required to divulge truthfully and

accurately, all material information about themselves and the securities they sell, for the protection of the

investing public, and under pain of administrative, criminal and civil sanctions. In connection with this, a fact

is deemed material if it tends to induce or otherwise effect the sale or purchase of its securities. While the

employment of this policy is recognized and sanctioned by the laws, nonetheless, the Revised Securities Act

sets substantial and procedural standards which a proposed issuer of securities must satisfy. Pertinently,

Section 9 of the Revised Securities Act sets forth the possible Grounds for the Rejection of the registration

of a security:

— The Commission may reject a registration statement and refuse to issue a permit to sell the

securities included in such registration statement if it finds that —

(1) The registration statement is on its face incomplete or inaccurate in any material respect or

includes any untrue statement of a material fact or omits to state a material fact required to be

stated therein or necessary to make the statements therein not misleading; or

(2) The issuer or registrant —

(i) is not solvent or not in sound financial condition;

(ii) has violated or has not complied with the provisions of this Act, or the rules

promulgated pursuant thereto, or any order of the Commission;

(iii) has failed to comply with any of the applicable requirements and conditions that

the Commission may, in the public interest and for the protection of investors, impose

before the security can be registered;

(iv) has been engaged or is engaged or is about to engage in fraudulent transaction;

(v) is in any way dishonest or is not of good repute; or

(vi) does not conduct its business in accordance with law or is engaged in a business

that is illegal or contrary to government rules and regulations.

(3) The enterprise or the business of the issuer is not shown to be sound or to be based on sound

business principles;

(4) An officer, member of the board of directors, or principal stockholder of the issuer is disqualified

to be such officer, director or principal stockholder; or

 (5) The issuer or registrant has not shown to the satisfaction of the Commission that the sale of its

security would not work to the prejudice of the public interest or as a fraud upon the purchasers or

investors. (Emphasis Ours)

The absolute reliance on the full disclosure method in the registration of securities is, therefore,

untenable. As it is, the Court finds that the private respondent PALI, on at least two points (nos. 1 and 5) has

failed to support the propriety of the issue of its shares with unfailing clarity, thereby lending support to the

conclusion that the PSE acted correctly in refusing the listing of PALI in its stock exchange. This does not

discount the effectivity of whatever method the SEC, in the exercise of its vested authority, chooses in

setting the standard for public offerings of corporations wishing to do so. However, the SEC must recognize

and implement the mandate of the law, particularly the Revised Securities Act, the provisions of which

cannot be amended or supplanted by mere administrative issuance.

6. SEC (Petitioner) vs. Performance Foreign Exchange Corp.

(Respondent)

G.R. No. 154131, July 20, 2016, Sandoval-Gutierrez, J.

The Commission, after proper investigation or

verification, motuproprio, or upon verified complaint by any

aggrieved party, may issue a cease and desist order without the

necessity of a prior hearing if in its judgment the act or practice,

unless restrained, will operate as a fraud on investors or is otherwise

likely to cause grave or irreparable injury or prejudice to the investing

public.

FACTS:

The respondent is a domestic corp duly registered with sec. Its

primary purpose is engage as agent/broker

in transactionsinvolving foreign exchange and other similar or

derivative products. Its secondary purpose is to engage in exchange

of foreign currency. The sec ordered the respondent to appear

before compliance and enforcement division (CED), through a letter,

for clarificatory conference regarding its business operation.

Subsequently, CED Director issued a cease and desist order

for possible violation of SRC by the respondent on the ground that it

is engaged in trading foreign currency future contracts in behalf of

its clients without license. SEC sent a letter to BSP requesting a

definitive statement whether the respondent is engaged in

transacting financial derivatives that can only be done by banks and

quasi-banks. MR has been filed by the respondent to lift the cease

and desist order. However, SEC denied the motion pending the

determination of BSP, and thereafter, making the cease and desist

order permanent. The respondents filed a petition for certiorari

before the CA for the alleged grave abuse of discretion of SEC for

issuing cease and desist orders without the determination of BSP.

CA ruled in favor of the respondent finding the BSP's answer to the

request of SEC, explaining that the respondent's business activities

does not fall under the category of future trading and such cannot

be classified as financial derivative transactions.

ISSUE:

WON SEC acted with grave abuse of discretion.

HELD:

Yes. The order of cease and desist order by the petitioner amounts

to grave abuse of discretion due to lack of factual investigation on

the said matter and there is no finding that the act or practice,

unless restrained, will operate as a fraud on investors or is otherwise

likely to cause grave or irreparable injury or prejudice to the investing

public. Section 64 of R.A. No. 8799, provides: Sec. 64. Cease and

Desist Order. 64.1. The Commission, after proper investigation or

verification, motuproprio, or upon verified complaint by any

aggrieved party, may issue a cease and desist order without the

necessity of a prior hearing if in its judgment the act or practice,

unless restrained, will operate as a fraud on investors or is otherwise

likely to cause grave or irreparable injury or prejudice to the investing

public. Under the above provision, there are two essential

requirements that must be complied with by the SEC before it may

issue a cease and desist order: First, it must conduct proper

investigation or verification; and Second, there must be a finding

that the act or practice, unless restrained, will operate as a fraud on

investors or is otherwise likely to cause grave or irreparable injury or

prejudice to the investing public. Here, the first requirement is not

present. Petitioner did not conduct proper investigation or

verification before it issued the challenged orders.

The clarificatory conference undertaken by petitioner

regarding respondents business operations cannot be considered a

proper investigation or verification process to justify the issuance of

the Cease and Desist Order. It was merely an initial stage of such

process. Before a cease and desist order may be issued by the SEC,

there must be a showing that the act or practice sought to be

restrained will operate as a fraud on investors or is likely to cause

grave, irreparable injury or prejudice to the investing public.

8. Power Homes Unlimited Corp. vs. SEC, G.R. No. 164182, Feb. 26,

2008, Puno, C.J.

An investment contract is 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.

Facts:

Petitioner is a domestic corporation duly registered with public

respondent SEC on October 13, 2000. Its primary purpose is: To

engage in the transaction of promoting, acquiring, managing,

leasing, obtaining options on, development, and improvement of real

estate properties for subdivision and allied purposes, and in the

purchase, sale and/or exchange of said subdivision and properties

through network marketing.

On October 27, 2000, respondent Noel Manero requested public

respondent SEC to investigate petitioners business. He claimed that

he attended a seminar conducted by petitioner where the latter

claimed to sell properties that were inexistent and without

any brokers license. On November 21, 2000, one Romulo

E. Munsayac, Jr. inquired from public respondent SEC whether

petitioners business involves legitimate network marketing. On the

bases of the letters of respondent Manero and Munsayac, public

respondent SEC held a conference on December 13, 2000 that was

attended by petitioners incorporators John Lim, Paul Nicolas

and Leonito Nicolas. The attendees were requested to submit

copies of petitioners marketing scheme and list of its members with

addresses.

The following day or on December 14, 2000, petitioner submitted to

public respondent SEC copies of its marketing course module and

letters of accreditation/authority or confirmation from Crown

Asia, Fil-Estate Network and Pioneer 29 Realty Corporation. On

January 26, 2001, public respondent SEC visited the business

premises of petitioner wherein it gathered documents such as

certificates of accreditation to several real estate companies, list of

members with web sites, sample of member mail box, webpages of

two (2) members, and lists of Business Center Owners who are

qualified to acquire real estate properties and materials on

computer tutorials.

On the same day, after finding petitioner to be engaged in the sale

or offer for sale or distribution of investment contracts, which are

considered securities under Sec. 3.1 (b) of Republic Act (R.A.) No.

8799 (The Securities Regulation Code) but failed to register them in

violation of Sec. 8.1 of the same Act, public respondent SEC issued

a CDO.

Issue:

Whether petitioners business constitutes an investment contract

which should be registered with public respondent SEC before its

sale or offer for sale or distribution to the public.

Held:

Yes. Petitioner was engaged in the sale or distribution of an

investment contract. 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.

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. 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. The US Supreme Court, recognizing that

the term investment contract was not defined by the Act or illumined

by any legislative report, held that Congress was using a term whose

meaning had been crystallized under the states blue sky laws in

existence prior to the adoption of the Securities Act. 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. It established a test to determine whether a

transaction falls within the scope of an investment contract. 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. Although the proponents

must establish all four elements, the US Supreme Court stressed

that the HoweyTest 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. 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. In this case, the 9 Circuit of the US Court of

th

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 e

xpect 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 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 Circuit held that self-improvement contracts which primarily

th

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.

9. SECURITIES AND EXCHANGE COMMISSION v. PROSPERITY

COM.,INC.

GR NO 164197, JANUARY 25, 2012

HOWEY TEST: 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.

FACTS:

Prosperity Com Inc (PCI) sold computer software and hosted

websites without providing internet service. To make a profit, the

PCI devised a scheme in which, for the price of US$234 , a

buyer cpuld acquire from it an internet website and could earn

commissions, interest in real estate in the Philippines and in the US,

and insurance coverage worth P50,000.00 by referring to the PCI his

own down-line buyers.

Apparently, the PCI patterned its scheme from that of the Golconda

Ventures, Inc.,(GVI) which company stopped operations after the

SEC issued a cease and desist order against (CDO) it. As it later on

turned out, the same persons who ran the affairs of the GVI directed

the PCI’s actual operations. Disgruntled elements of the GVI filed a

complaint with the SEC against PCI, alleging that PCI had taken over

the GVI’s operations. Consequently, SEC issued a CDO against the

PCI and ruled that PCI’s scheme constitutes an investment contract

which should have been registered first with the SEC following the

Securities Regulations Code.

Upon petition by PCI to the CA, the latter granted such petition and

set aside the SEC-issue CDO.

ISSUE:

Whether or not PCI’s scheme constitutes an investment contract

that requires registration with the SEC.

RULING:

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, 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.

The US Supreme Court held in SEC vs 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, the PCI’s scheme or

contract with its buyers must have all these elements. Here, the

PCI’s clients do not make such investments. The clients buy a

product of some value to them. The buyers of the website do not

invest money in the PCI that it could use for running some business
that would generate profits for the investors. Actually, the PCI

appears to be engaged in network marketing.

10. CEMCO HOLDINGS, INC., v. NATIONAL LIFE INSURANCE

COMPANY OF THE PHILIPPINES, INC.

G.R. No. 171815, 7 August 2007 (CHICO-NAZARIO, J.)

“[T]he coverage of the mandatory tender offer rule covers not only

direct acquisition but also indirect acquisition or ‘any type of

acquisition.’"

Petitioner Cemco Holdings, Inc. (Cemco) is a stock holder

of: (1) Universal Cement Corp. (UCC), a publicly listed company in

which Cemco owns 17.03% of shares; and (2) Universal Cement

Holdings Corp. (UCHC), a non-listed company whose 9% shares of

stock is also owned by Cemco. Majority of UCHC’s stocks were

owned by BacnotanConsolidated Industries, Inc. (Bacnotan for

brevity, shareholdings is 21.31%) and Atlas Cement

Corporation (Atlas for brevity, shareholdings is 29.69%). UCHC, on

the other hand, is a major stock holder of UCC whose stockholdings

is pegged at 60.51%.

In a disclosure letter, Bacnotan and Atlas informed the

Philippine Stock Exchange (PSE) had passed resolutions to sell their

stocks in UCHC to Cemco. As a result of the said

sale, Cemco’s total beneficial ownership, direct and indirect, in UCC

has increased by 36% and amounted to at least 53% of the shares

of UCC. Feeling aggrieved by the transaction, respondent National

Life Insurance Company of the Philippines, Inc.(NLICP), a minority

stockholder of UCC, sent a letter to Cemcodemanding the latter to

comply with the rule on mandatory tender offer. Cemco, however,

refused. As the transaction was consummated and closed,

NLICP filed a complaint with the SEC asking it to declare the

purchase agreement of Cemco void and praying that the mandatory

tender offer rule be applied to its UCC

shares. UCC, UCHC, Bacnotan, and Atlas were uniform in arguing

that the tender offer rule applied only to a direct acquisition of the

shares of the listed company and did not extend to an indirect

acquisition arising from the purchase of the shares of a holding

company of the listed firm. The SEC ruled that it has jurisdiction

over the case and that the tender offer rule was mandatory.

ISSUES:

1. Does the SEC have jurisdiction to require Cemco to make a

tender offer for respondent’s UCC shares?

2. Does the mandatory tender offer apply to the indirect

acquisition of shares in a listed company? (In this case, the

indirect acquisition by Cemco of 36% of UCC, a publicly-listed

company, through its purchase of the shares in UCHC, a

non-listed company)

RULING:

1. Yes, The SEC was acting pursuant to Rule19(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 SEC’s 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.

Moreover, petitioner is barred from questioning the jurisdiction of

the SEC. It must be pointed out that petitioner had participated in all

the proceedings before the SEC and had prayed for affirmative

relief.
2. Yes. Tender offer is a publicly announced intention by a person

acting alone or in concert with other persons to acquire equity

securities of a public company. A public company is defined as

a corporation which is listed on an exchange, or a corporation with

assets exceeding ₱ 50,000,000.00 and with 200 or more

stockholders, at least 200 of them holding not less than 100 shares

of such company. Stated differently, a tender offer is an offer by the

acquiring person to stockholders of a public company for them to

tender their shares therein on the terms specified in

the offer.Tender offer is in place to protect minority shareholders

against any scheme that dilutes the share value of their investments.

It 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. Under Section 19 of Republic Act No. 8799, it is stated:

Tender Offers. 19.1. (a) Any person or group of persons

acting in concert who intends to acquire at least fifteen percent

(15%) of any class of any equity security of a listed corporation

or of any class of any equity security of a corporation with

assets of at least Fifty million pesos (₱ 50,000,000.00) and

having two hundred (200) or more stockholders with at least one

hundred (100) shares each or who intends to acquire at least

 thirty percent (30%) of such equity over a period of twelve (12)

months shall make a tender offer to stockholders by filing with

the Commission a declaration to that effect; and furnish the

issuer, a statement containing such of the information required

in Section 17 of this Code as the Commission may prescribe.

Such person or group of persons shall publish all requests or

invitations for tender, or materials making a tender offer or

requesting or inviting letters of such a security. Copies of any

additional material soliciting or requesting such tender offers

subsequent to the initial solicitation or request shall contain

such information as the Commission may prescribe, and shall

be filed with the Commission and sent to the issuer not later

than the time copies of such materials are first published or

sent or given to security holders.

Under existing SEC Rules, the 15% and 30% threshold

acquisition of shares under the foregoing provision was increased to

thirty-five percent (35%). It is further provided therein that

mandatory tender offer is still applicable even if the acquisition is

less than 35% when the purchase would result in ownership of over

51% of the total outstanding equity securities of the public company.

The SEC and the Court of Appeals accurately pointed out that

the coverage of the mandatory tender offer rule covers not only
direct acquisition but also indirect acquisition or "any type of

acquisition." This is clear from the discussions of the Bicameral

Conference Committee on the Securities Act of 2000, on 17 July

2000. The petitioner posits that what it acquired were stocks of

UCHC and not UCC. By happenstance, as a result of the transaction,

it became an indirect owner of UCC. We are constrained, however,

to construe ownership acquisition to mean both direct and indirect.

What is decisive is the determination of the power of control. The

legislative intent behind the tender offer rule makes clear that the

type of activity intended to be regulated is the acquisition of control

of the listed company through the purchase of shares. Control may

be effected through a direct and indirect acquisition of stock, and

when this takes place, irrespective of the means, a tender offer must

occur. The bottomline of the law is to give the shareholder of the

listed company the opportunity to decide whether or not to sell in

connection with a transfer of control.

11. SECURITIES AND EXCHANGE COMMISSION

vs.

INTERPORT RESOURCES CORPORATION

G.R. No. 135808, October 6, 2008

CHICO-NAZARIO, J.:
Doctrine: Sections 30 and 36 of the RSA were enacted to promote

full disclosure in the securities market and prevent unscrupulous

individuals, who by their positions obtain non-public information,

from taking advantage of an uninformed public.

Facts: The Board of Directors of IRC approved a Memorandum of

Agreement with Ganda Holdings Berhad (GHB). Under the

Memorandum of Agreement, IRC acquired 100% or the entire capital

stock of Ganda Energy Holdings, Inc. (GEHI), which would own and

operate a gas turbine power-generating barge. In exchange, IRC will

issue to GHB 55% of the expanded capital stock of IRC.

On the side, IRC would acquire 67% of the entire capital stock of

Philippine Racing Club, Inc. (PRCI). Under the Agreement,

GHB, shall extend or arrange a loan required to pay for the proposed

acquisition by IRC of PRCI.

IRC alleged that a press release announcing the approval of the

agreement was sent through fax to Philippine Stock Exchange (PSE)

and the SEC, but that the fax machine of SEC could not receive

it. Upon the advice of the SEC, the IRC sent press release

announcing the approval of the agreement was sent through

facsimile transmission to the Philippine Stock Exchange and the

SEC
The SEC averred that it received reports that IRC failed to make

timely public disclosures of its negotiations with GHB and that some

of its directors, respondents herein, heavily traded IRC shares

utilizing this material insider information. The SEC Chairman issued

a directive requiring IRC to submit to the SEC a copy of its aforesaid

Memorandum of Agreement with GHB and explain IRC's failure to

immediately disclose the information as required by the Rules on

Disclosure of Material Facts.

The SEC Chairman issued an Order finding that IRC violated the

Rules on Disclosure of Material Facts, in connection with the Old

Securities Act of 1936, when it failed to make timely disclosure of its

negotiations with GHB. In addition, the SEC pronounced that some

of the officers and directors of IRC entered into transactions

involving IRC shares in violation of Section 30, in relation to Section

36, of the Revised Securities Act.

The case was elevated to the CA. Eventually CA determined that

there were no implementing rules and regulations regarding

disclosure, insider trading, or any of the provisions of the Revised

Securities Acts which the respondents allegedly violated. The Court

of Appeals likewise noted that it found no statutory authority for the

SEC to initiate and file any suit for civil liability under Sections 8, 30

and 36 of the Revised Securities Act. Thus, it ruled that no civil,

criminal or administrative proceedings may possibly be held against

the respondents without violating their rights to due process and

equal protection.

Issue:

1. Whether sections 30, and 36 of the Revised Securities Act

require the enactment of implementing rules to make them

binding and effective?

Ruling: No, In the absence of any constitutional or statutory

infirmity, which may concern Sections 30 and 36 of the Revised

Securities Act, this Court upholds these provisions as legal and

binding. It is well settled that every law has in its favor the

presumption of validity. Unless and until a specific provision of the

law is declared invalid and unconstitutional, the same is valid and

binding for all intents and purposes. The mere absence of

implementing rules cannot effectively invalidate provisions of law,

where a reasonable construction that will support the law may be

given.

Sections 30 and 36 of the RSA were enacted to promote full

disclosure in the securities market and prevent unscrupulous

individuals, who by their positions obtain non-public information,

from taking advantage of an uninformed public.

Sec 30 prevented the unfair use of non-public inf

ormation in securities transactions, while Sec 36 allo

wed the SEC to monitor the transactions entered into

by corporate officers and directors as regards the securities oftheir

companies.

The lack of

implementing rules cannot suspend the effectivityof these provisi

ons.