Page 1 of 4 1

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..

-------
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).
Page 2 of 4 2

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.

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”
Page 3 of 4 3

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; Commented [u1]: Sec.3.2 Is the originator, maker,

(ii) a director or officer (or person performing similar functions) of, or obligor, or creator of the security. Securities
statutes have been enacted principally to protect
a person controlling the issuer;
the investing public from unscrupulous issuers.
(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 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
Page 4 of 4 4

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 Commented [RSB2]: Section 8. Requirement of
require the enactment of implementing rules to make them binding and Registration of Securities
effective. SEC v. Interport Resources Corporation , supra. Commented [RSB3]: Section 30. Transactions and
Responsibility of Brokers and Dealers.
Commented [RSB4]: Section 36. Powers with
Respect to Exchanges and Other Trading Market

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.