PROCEDURE FOR THE REGISTRATION OF SECURITIES

• What are the procedures for the registration of securities (see Sec. 12,
SRC)?
1. filing of the following with the SEC:
a. sworn registration statement (standard pro forma form)
SIGNATORIES TO A REGISTRATION STATEMENT (see sec. 12.4)
-the same persons who will be held liable if there is something wrong with
the registration statement.
i. Chief Executive Officer
ii. Chief Operating Officer
iii. Chief Financial Officer
iv. Accounting Manager/Comptroller
v. Corporate Secretary
vi. Expert Opinion (signature is not mandatory)

b. attach the Resolution of the Board of Directors

c. prospectus- normally contains all the necessary information about the

issuer or about the business
d. other information that may be required (sangkatutak na annexes!)

2. Payment of filing pay—1/10 of 1% of the aggregate price of the securities that

you are going to offer for sale. [see Sec. 12.5(a)]

3. Publication – 2 newspapers of general circulation once a week for 2 consecutive

weeks. [Sec. 12.5 (b)]

• How long will the SEC issue an Order either approving or denying the
application? (see sec. 12.6)
--within 45 days from the filing of the registration statement.
--TAKE NOTE! It is only upon the issuance of the Order by the SEC approving
registration registration statement does the issuer be allowed to sell the securities or
offer them for sale. So any sale made prior to the effectivity of the registration
statement is considered NULL and VOID.

• Grounds of the SEC to reject/revoke the registration of securities. (Sec.

13)
(a) The issuer:
(i) Has been judicially declared insolvent;
(ii) Has violated any of the provisions of this Code, the rules promulgated pursuant
thereto, or any order of the Commission of which the issuer has notice in connection
with the offering for which a registration statement has been filed;
(iii) Has been or is engaged or is about to engage in fraudulent transactions;
(iv) Has made any false or misleading representation of material facts in any
prospectus concerning the issuer or its securities;
(v) Has failed to comply with any requirement that the Commission may impose as a
condition for registration of the security for which the registration statement has been
filed; or

(b) 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

(c) The issuer, any officer, director or controlling person of the issuer, or person
performing similar functions, or any underwriter has been convicted, by a competent
judicial or administrative body, upon plea of guilty, or otherwise, of an offense
involving moral turpitude and/or fraud or is enjoined or restrained by the Commission
or other competent judicial or administrative body for violations of securities,
commodities, and other related laws.
--TAKE NOTE! Judicial or administrative body here includes decisions of a FOREIGN
COURT.

• Grounds for the suspension of the sale of the securities.

--practically the same with that of revocation
SEC. 15. Suspension of Registration. - 15.1. If, at any time, the information contained
in the registration statement filed is or has become misleading, incorrect, inadequate
or incomplete in any material respect, or the sale or offering for sale of the security
registered thereunder may work or tend to work a fraud, the Commission may require
from the issuer such further information as may in its judgment be necessary to
enable the Commission to ascertain whether the registration of such security should
be revoked on any ground specified in this Code. The Commission may also suspend
the right to sell and offer for sale such security pending further investigation, by
entering an order specifying the grounds for such action, and by notifying the issuer,
underwriter, dealer or broker known as participating in such offering.

15.2. The refusal to furnish information required by the Commission may be a ground
for the issuance of an order of suspension pursuant to Subsection 15.1. Upon the
issuance of any such order and notification to the issuer, underwriter, dealer or broker
known as participating in such offering, no further offer or sale of any such security
shall be made until the same is lifted or set aside by the Commission. Otherwise, such
sale shall be void.

15.3. Upon issuance of an order of suspension, the Commission shall conduct a

hearing. If the Commission determines that the sale of any security should be
revoked, it shall issue an order prohibiting sale of such security.
Until the issuance of a final order, the suspension of the right to sell, though binding
upon the persons notified thereof, shall be deemed confidential, and shall not be
published, unless it shall appear that the order of suspension has been violated after
notice. If, however, the Commission finds that the sale of the security will neither be
fraudulent nor result in fraud, it shall forthwith issue an order revoking the order of
suspension, and such security shall be restored to its status as a registered security
as of the date of such order of suspension.

• Amendments to the Registration Statement. (sec. 14)

SEC. 14. Amendments to the Registration Statement. - 14.1. If a registration

statement is on its face incomplete or inaccurate in any material respect, the
Commission shall issue an order directing the amendment of the registration
statement. Upon compliance with such order, the amended registration statement
shall become effective in accordance with the procedure mentioned in Subsection
12.6 hereof.

14.2. An amendment filed prior to the effective date of the registration statement
shall recommence the forty-five (45) day period within which the Commission shall
act on a registration statement. An amendment filed after the effective date of the
registration statement shall become effective only upon such date as determined by
the Commission.

14.3. If any change occurs in the facts set forth in a registration statement, the issuer
shall file an amendment thereto setting forth the change.

14.4. If, at any time, the Commission finds that a registration statement contains any
false statement or omits to state any fact required to be stated therein or necessary
to make the statements therein not misleading, the Commission may conduct an
examination, and, after due notice and hearing, issue an Order suspending the
effectivity of the registration statement. If the statement is duly amended, the
suspension order may be lifted.
14.5. In making such examination the Commission or any officer or officers
designated by it may administer oaths and affirmations and shall have access to, and
may demand the production of, any books, records or documents relevant to the
examination. Failure of the issuer, underwriter, or any other person to cooperate, or
his obstruction or refusal to undergo an examination, shall be a ground for the
issuance of a suspension order.

PRE-NEED PLANS

• What is a pre-need plan?

--contract which offer the performance of a future service or if not service for the
payment of a future amount in money
--paying it in advance in anticipation for a future need.
--affects public interest that is why it is regulated by the state (particularly the
SEC)
SEC.16. Pre-Need Plans. - No person shall sell or offer for sale to the public any pre-need plan
except in accordance with rules and regulations which the Commission shall prescribe. Such
rules shall regulate the sale of pre-need plans by, among other things, requiring the
registration of pre-need plans, licensing persons involved in the sale of pre-need plans,
requiring disclosures to prospective plan holders, prescribing advertising guidelines, providing
for uniform accounting system, reports and record keeping with respect to such plans,
imposing capital, bonding and other financial responsibility, and establishing trust funds for the
payment of benefits under such plans.

• Examples:
--insurance; educational plan; memorial plan

PROTECTION OF SHAREHOLDER INTERESTS

--deals with the protection of the rights of existing shareholders’ interest

1. Tender Offer Rule (Sec. 19)

• What is meant by tender offer?

--a publicly announced intention
--applies to any person or group of persons who intend to acquire equity
securities of a public company/corporation (meaning ownership
or control over the corp.)
PUBLIC COMPANY- shares of stocks are listed in the Stock exchange
-with assets of more than 50M and with 200 or more
stockholders and at least 200 SH own at least
100 shares each.
-- any person or group of persons who intend to acquire equity securities of a
public company/corporation is required to make your intention
public or made known to all shareholders.

• Purpose of tender offer

--to protect minority shareholders against any scheme that will dilute the value of
their shares by giving them opportunity to sell their shares at the
same price offered to majority shareholders.

• When is the tender offer rule mandatory?

--single transaction – 35%
--creeping acquisition within 12 mos.– 35%
--although you acquire less than 35% but after the acquisition it would result to
ownership of more than 51%

• How is it done?
 --example you want to acquire only 70% since the tender offer rule requires that
you have to make your offer to all stockholders, so you have to buy from all the
stockholders on a pro rata basis.
--example: 20 (shares of the minority) / 100 (total shares) x 70% (shares to be
acquired)
--so the effect is that, even if you hold a minority share, you are given the
opportunity to sell.

• Procedure for making the tender offer

1. file the declaration with the SEC
2. pay the filing fee
3. furnish the issuer a statement containing the info./declaration
4. publication- purpose is to give notice to all stockholders (including the minority)

--what if all the minority SH will sell, are you compelled to buy all? No. Again you
do it in a pro rata basis.
--NOTE: what the law requires is only to give the minority stockholders the
opportunity to sell. If they would not, there is no problem with that.

• Transactions exempt from the tender offer rule. (see the IRR)
1. Tender Offer rule will not apply to any purchase from the UNISSUED SHARES.
REASON: a. the law grants the SH the pre-emptive right
b. the existing Stockholders are not selling their shares, only the
unissued shares.
GR: tender offer rule not applicable in the purchase of unissued shares.
EXC: acquisition will not result to 50% or more ownership.

2. When there is an increase in authorized capital stock.

REASON: a. the law grants the SH the pre-emptive right
b. the existing Stockholders are not selling their shares, only the
unissued shares.

3. Purchase of shares pursuant to a foreclosure proceeding.

REASON: what is purchased here is only the share subject of the
foreclosure.

4. Privatization by the government.

5. When you acquired the shares pursuant to corporate rehabilitation.
6. When you acquired the shares in an open market.
7. When you acquired the shares pursuant to a merger or consolidation.

Case:
CEMCO HOLDINGS vs. National Life

FACTS:

BPI (20.21%) APP (29.59%) CEMCO (9%)

UCHD (60.51%) CEMCO (17.03%)

(non public corp.)

UCC
(Public Corporation)

-CEMCO acquired BPI and APP shares in UCHD thereby increasing its ownership in UCHD
to 51%.
-Phil. National life Insurance (minority) was aggrieved. It claimed that no tender offer was
made when CEMCO acquired the shares of BPI and APP in UCHD.
-CEMCO on the other hand alleged that it is not required to tender offer because it did
not acquire the shares of UCC (a public corporation) but that of UCHD (a non public corp.

ISSUE: WON the tender offer rule is applicable.

RULING:
Yes.
Mandatory coverage of the tender offer rule does not only apply to direct acquisition of
stocks but also to indirect acquisition of stocks. RATIONALE: although CEMCO acquired
less than 35% of UCHD, it is covered because after the acquisition CEMCO’s ownership in
UCC increased to more than 51%.

2. Proxy Rules (Sec. 28)

• What do you understand by proxy rule?

--applies to any stockholders’ meeting in a public company.

• REQUIREMENTS
1. must be in writing
2. signed by the stockholder or his duly authorized representative.
3. submitted/filed before the scheduled meeting.
4. valid only for the particular meeting. Provided that it is effective for a period not
longer than 5 years.
5. If the broker or dealer acquires 10% of the shares by proxy, he shall submit a
report identifying the beneficial owner within ten (10) days after such
acquisition, for its own account or customer, to the issuer of the security, to the
Exchange where the security is traded and to the Commission.
6. Broker can give a proxy provided that there is authorization from the customer.

3. Disclosure Rule (Sec. 23)

--more of a reportorial requirement

--applies to directors, officers and principal stockholders.

• When is it applicable?
--applicable only to public companies.

1. if you become a beneficial owner of at least 10% of the shares of a public

company or you are a director or officer of that company, you are required to
file a statement with the SEC.
PURPOSE: for disclosure because these will later on become a public document.

2. change of ownership- file a statement with the SEC within 10 days after the
close of each calendar month thereafter.

Prohibitions on Fraud, Manipulationn and Inside Trading (Sec. 24-

27)

• Manipulation of Prices (Sec. 24)

--Why prohibit? Because it affects public interest. They say that the strength of our
economy will reflect in the prices of your stocks.

• Prohibited Acts/ Unlawful Activities

1. Manipulation of Security Prices

SEC. 24. Manipulation of Security Prices; Devices and Practices. - 24.1 It shall be
unlawful for any person acting for himself or through a dealer or broker, directly or
indirectly:
(a) To create a false or misleading appearance of active trading in any listed security
traded in an Exchange or any other trading market (hereafter referred to purposes of
this Chapter as “Exchange”):
(i) By effecting any transaction in such security which involves no change in the
beneficial ownership thereof;
(ii) By entering an order or orders for the purchase or sale of such security with the
knowledge that a simultaneous order or orders of substantially the same size, time
and price, for the sale or purchase of any such security, has or will be entered by or
for the same or different parties; or
(iii) By performing similar act where there is no change in beneficial ownership.

NOTE: known as WASH SALE- you create an appearance of active trading but the
truth is there is no transfer of ownership. Or basically the buyer and the seller are just
the same persons who connived to buy and sell the shares for purposes of making it
appear that there is active trading.

HOW WOULD IT MANIPULATE THE PRICE? If your stock is active on that

day, it would create an impression that your stocks are good and it will
deceive the people to buy.

--the manipulation here refers to increase in price or decrease in price. What is

key in wash sale is there is no change of beneficial ownership.

(b) To effect, alone or with others, a series of transactions in securities that:

(i) Raises their price to induce the purchase of a security, whether of the same or a
different class of the same issuer or of a controlling, controlled, or commonly
controlled company by others;
(ii) Depresses their price to induce the sale of a security, whether of the same or a
different class, of the same issuer or of a controlling, controlled, or commonly
controlled company by others; or
(iii) Creates active trading to induce such a purchase or sale through manipulative
devices such as marking the close, painting the tape, squeezing the float, hype and
dump, boiler room operations and such other similar devices.

MARKING THE CLOSE- at the start of the day the stock is inactive but towards
the close of the market it becomes active.
PURPOSE: to make it appear that the stock ended good. Thus,
making it appear that the stock is good and increase its price the
following day.

PAINTING THE TAPE- you engage in a series of transactions to give an

impression of activities or price movement in securities.
- the difference with wash sale is that in wash sale there is no
change in beneficial ownership.
-generally, stock exchange involves a series of transactions
but it becomes illegitimate when there is COLLUSION between the buyer and the
seller.

SQUEEZING THE FLOAT- you take advantage of a shortage in securities by

controlling demand side and exploiting market advantage during such
shortage in a way to create increase in prices. [analogous to the Law of Supply
and Demand]

HYPE AND DUMP- you constantly buy securities at a higher price and after
establishing a very high price, you dump the securities by selling it at a profit. [You
create the hype by creating an artificial inflation or increase in price and then sell it
at a profit.]

BOILER ROOM OPERATIONS- used to describe the situation where there are
several salesmen in a room doing pressure sales talk to lure investors in the
securities being offered.
 NOTE: all manipulate the stock prices.

(c) To circulate or disseminate information that the price of any security listed in an
Exchange will or is likely to rise or fall because of manipulative market operations of
any one or more persons conducted for the purpose of raising or depressing the price
of the security for the purpose of inducing the purchase or sale of such security.

(d) To make false or misleading statement with respect to any material fact, which he
knew or had reasonable ground to believe was so false or misleading, for the purpose
of inducing the purchase or sale of any security listed or traded in an Exchange.

(e) To effect, either alone or others, any series of transactions for the purchase and/or
sale of any security traded in an Exchange for the purpose of pegging, fixing or
stabilizing the price of such security, unless otherwise allowed by this Code or by
rules of the Commission.

2. Option Trading
• What is Option Trading ? (Sec. 25)
--you give an option either to sell or to buy.

• Important terms
a. Put- option to sell
b. Call- option to buy
c. Straddle- option to buy or sell
NOTE: brokers are not allowed to engage in option trading.
SEC. 25. Regulation of Option Trading. – No member of an Exchange shall, directly or indirectly
endorse or guarantee the performance of any put, call, straddle, option or privilege in relation to
any security registered on a securities exchange.
The terms “put”, “call”, “straddle”, “option”, or “privilege” shall not include any registered
warrant, right or convertible security.

RATIONALE: to avoid the danger that the person to whom the option is given may
abuse the option by acquiring or exercising the option involving large number of
shares for a certain period. When the person whom the option was given will not
exercise the option, it will in a way manipulate the market because the seller cannot
sell it to another within the agreed period.
EXC: registered warrants (right to exercise the warrant within a certain period) and
convertible securities (right to convert the securities within a certain period).

3. Fraudulent Transactions
• Fraudulent Transactions (Sec. 26)
SEC. 26. Fraudulent Transactions. - It shall be unlawful for any person, directly or indirectly, in
connection with the purchase or sale of any securities to:
26.1. Employ any device, scheme, or artifice to defraud;
26.2. Obtain money or property by means of any untrue statement of a material fact of any
omission to state a material fact necessary in order to make the statements made, in the light of
the circumstances under which they were made, not misleading; or
26.3. Engage in any act, transaction, practice or course of business which operates or would
operate as a fraud or deceit upon any person.

4. Inside Trading
• What is insider trading? (Sec. 27)
--it is insider trading when you either buy or sell securities while you are in
possession of a material information and that information is not yet made known
to the public.
--You call that MATERIAL NON PUBLIC INFORMATION.
--it is disallowed because you are taking undue advantage of the information when
you buy and sell the shares.

• Who is an insider?
 a. director, officer or a person controlling or under common control of the issuer
(like a subsidiary or holding company)
b. persons who by reason of their relationship or former relationship have access
to any material or significant information not made known to the public.
c. Government employees that have access to some material information not
known to the public (e.g. SEC, BFAD, IPO)
d. Persons who knew of a material information from an insider.

• What is a material non-public information?

27.2. For purposes of this Section, information is “material non-public “ if:

(a) It has not been generally disclosed to the public and would likely affect the market
price of the security after being disseminated to the public and the lapse of a
reasonable time for the market to absorb the information; or

(b) would be considered by a reasonable person important under the circumstances in

determining his course of action whether to buy, sell or hold a security.

--PRESUMPTION UNDER THE SRC: if you buy and sell the shares after you acquire the
information but before the same is released to the public, it is presumed to be an
insider trading.

• Instances not considered by law as insider trading.

1. if the insider could prove that the information was not gained by virtue of
that relationship (not because he was a director or officer).
2. If the insider would prove that the other party to the transaction knew of
the information or he has disclosed the information to the other party.

• Example: A, B, C and D are all directors of a public company—ABC.

A – Sept. 1, 2010 purchased 1000 shares

B - Sept. 1, 2010 purchased 1000 shares
- left for abroad on Sept. 30, 2010
C - Sept. 1, 2010 purchased 1000 shares

In a BOD meeting on Oct. 5, 2010 where only A and C attended they made a
disclosure that they already have a perfected mining claim on a particular area. On
Nov. 5, 2010 A and C sold their shares. On Dec. 5, 2010 when he came back to the
Philippines he also sold his share. Is A, B and C, liable for inside trading?

In Sept 1, 2010 when A, B and C bought the shares, is there insider trading?
--none because they are not in possession of any material non public
information.

In Nov. 5, 2010 when A and C sold their shares, is there insider trading?
--yes, applying the presumption. They already possess the material un public
information.

In Dec. 5, 2010 when B sold his shares, is there insider trading?

--none because at the time he sold his share, he did not have any information of
a material unpublic information.

NOTE: insider trading could applies not only when you sell your shares to earn profit
but also when you sell your shares because you know that the company is going down
because you are taking undue advantage of an information that is not known to the
public.

• Unlawful to Communicate information (Sec. 27.3)

27.3. It shall be unlawful for any insider to communicate material non-public information about the
issuer or the security to any person who, by virtue of the communication, becomes an insider as
defined in Subsection 3.8, where the insider communicating the information knows or has reason to
believe that such person will likely buy or sell a security of the issuer while in possession of such
information.
--NOTE: it also applies to tender offers.

5. Use of Extensive credit/ Margin Trading

• Use of Extensive Credit (Sec. 48.1)

SEC. 48. Margin Requirements. - 48.1. For the purpose of preventing the excessive
use of credit for the purchase or carrying of securities, the Commission, in accordance
with the credit and monetary policies that may be promulgated from time to time by
the Monetary Board of the Bangko Sentral ng Pilipinas, shall prescribe rules and
regulations with respect to the amount of credit that may be extended on any
security. For the extension of credit, such rules and regulations shall be based upon
the following standard:

An amount not greater than whichever is the higher of -

(a) Sixty-five per centum (65%) of the current market price of the security; or

(b) One hundred per centum (100%) of the lowest market price of the security during
the preceding thirty-six (36) calendar months, but not more than seventy-five per
centum (75%) of the current market price.
However, the Monetary Board may increase or decrease the above percentages, in
order to achieve the objectives of the Government with due regard for promotion of
the economy and prevention of the use of excessive credit.

Such rules and regulations may make appropriate provision with respect to the
carrying of undermargined accounts for limited periods and under specified
conditions; the withdrawal of funds or securities; the transfer of accounts from one
lender to another; special or different margin requirements for delayed deliveries,
short sales, arbitrage transactions, and securities to which letter (b) of the second
paragraph of this subsection does not apply; the bases and the methods to be used in
calculating loans, and margins and market prices; and similar administrative
adjustments and details.

• What is Margin Trading?

--you bought shares without paying for the full purchase price. It is the broker who
advanced the purchase price and the security that is being acquired is made as a
collateral.
--example: you bought shares at purchase price of 100 and you paid only 30. So
the broker paid 70. The 30 is called the margin. The broker will recover the 70
upon the sale of the said security in the future where the proceeds will be applied as
payment of the debt.
--In a way the broker is extending you a credit.

• Limitation on the use of the credit.

--the credit extended by the broker is for an amount not greater than whichever is
higher an between:
a. 65% of the current market price of the security; or
EXAMPLE: current market price of the security is 100, so the broker can
extend credit to a maximum of 65.
b. 100% of the lowest market price of the security during the preceding 36
months but not exceeding 75% of the current market price.
EXAMPLE: if the lowest market price for the security for the last calendar
month is 70, the higher between 65 and 70 is the extent of the credit
but not to exceed 75% of the current market price.
--RATIONALE: regulate the credit on which collection hinges on speculation.

Case:
ABACUS SECURITY vs. AMPIL
FACTS:
-Abacus is engaged in the business of buying and selling of stocks on credit.
-it extended credit to Ampil.
-Ampil failed to pay some of the transactions, but despite Ampil’s failure to pay,
Abacus still extended credit and allowed Ampil to trade.
-Ampil’s defense: Abacus can only extend credit if there is a collateral. It is absent
here, thus, no collection can be had.

ISSUE:

RULING:
Ampil is liable for the first transaction. The pari delicto rule applied only to the
subsequent transactions. They are in pari delicto because
Abacus was guilty of violating the SRC for extending credit despite Ampil’s failure to
pay the previous obligations. The explanation given by the court why it continued
extending loan despite failure of payment is that he will lose nothing. Ampil is also
equally guilty because he violated the SRC provision on margin trading.

Kulang ang last case.

--oOo--

Nothing follows.
ADSUM