SECURITIES AND REGULATION CODE

What is an investment contract?

A contract, transaction or scheme whereby a person invests his money in a common enterprise
and is led to expect profits primarily from the efforts of the promoter or a 3rd party (Justee Terms
Enterprises v. SEC)

What are the requisites of an investment contract?

1. Contract, transaction or scheme;
2. An investment of money;
3. The investment is made in a common enterprise;
4. There is expectation of profits; and
5. Profits arise from the entrepreneurial and managerial efforts of others (supra.)

Why is it unlawful?
1. More than 19 persons; and
2. Absence of registration statement (Sec. 8)

NOTE:
1. If with goods (e.g. multi-level marketing scheme), DTI has jurisdiction
2. There is no "pyramiding" in SRC
There is "pyramiding" in Consumers Act

What is a tender offer?

A publicly announced intention, acting alone or in concert with others, to acquire equity
securities of a company.

When is a tender offer required?

a. When the person intends to acquire 15% or more of the equity share of a public company
pursuant to an agreement made between or among the person and one or more sellers;
b. When the person intends to acquire 30% or more of the equity share of a public company
within a period of 12 months; and
c. When the person intends to acquire shares that would result in an ownership of more than
50% of the equity shares of a public company. (Sec. 19)

What is an independent director?

A person other than an officer or employee of the corporation, its parent or subsidiaries, or any
other individual having a relationship with the corporation, which would interfere with the
exercise of independent judgment in carrying out the responsibilities of a director (Sec. 38)

What are those entities which require an independent director?

a. An exchange; or
b. Any corporation with a class of equity securities listed for trading on an Exchange or
with assets in excess of P50M and having 200 or more holders, at least 200 of which are
holding at least 100 shares of a class of its equity securities or which has sold a class of
equity securities to the public pursuant to an effective registration statement shall have at
 least two (2) independent directors or such independent directors shall constitute at least
20% of the members of such board, whichever is the lesser.(Sec. 38)

X - 10M share in Z Corp.

A - broker
B - broker

10:00am X to A - P1.20/share
10:02am X to B - P1.20/share

Is there wash sale?

Yes, there is no change of ownership

Is there matched order?

Yes, there is knowledge of simultaneous order of substantially the same size, time and price for
the sale and purchase of the security

Is it illegal?
Not yet. It must first create a false or misleading appearance of active trading in the security
concerned.

When is wash sale and matched orders become illegal?

When they are used as a means to create false appearance of active trading in the security
concerned

When is Marking the close, Painting the tape, Squeezing the float, Hype and dump, Boiler
Room Operations become illegal?
If it is effected to either raise the price or induce the purchase of a security or of a controlling,
controlled, or commonly controlled company by others or to depress the price to induce the sale
of a security, whether of the same or of a different class, of the same issuer or of a controlling,
controlled company or common controlled company by others or to create active trading to
induce the purchase through said devices or schemes

NOTES:
1. T3 (Trading day + 3 days to comply with the obligations)

MCQ:
The sale of security or securities made by a vendor who does not own, hold or posses the shares
is called
a. Wash sale
b. Painting the tape
c. Matched order
d. Short sale

ANSWER:
d.
Case problem:
X is the owner of 1M shares are being traded at P1.00 per share. He has an account in two broker
firms, B1 and B2. He directs B1 to sell 250T shares at 10.30 at P1.25 per share and at 10.32, he
directs B2 to buy the same number of shares at the same price.
a. Can X be held liable for wash sale and matched order? Explain.
b. If he sells shares of stock which he does not own, what unlawful act will be
commit?

ANSWERS:
a. Yes.

There is wash sale because there is no change in beneficial ownership of the security
involved. In this case, a series of buy and sale transaction is placed by one and same
beneficial owner who is X in the exchange which would not affect any change of
ownership of the shares transacted.

There is matched order because there is knowledge of simultaneous order of substantially

the same size, time and price for the sale and purchase of the security.

b. He committed short sale because it is defined as selling security which the vendor does
not own which is illegal per se under Sec. 24.2 of the SRC.

Objective:
1. Define: State whether they are illegal per se or when they may become illegal.
a. Wash sale
b. Matched order
c. Short sale

ANSWERS:
a. Wash Sale – engaging in transactions in which there is no genuine change in actual
ownership of a security; prohibited conducted under Rule 24, Implementing Rules and
Regulations of the SRC
b. Matched Order – engaging in transactions where both buy and sell orders are entered at
the same time with the same price and quantity by different but colluding parties;
improper matched orders are prohibited conduct under Rule 24, IRR of the SRC; and
c. Short Sale- any sale of a security which the seller does not own or any sale which is
consummated by the delivery of a security borrowed by, or for the account of the seller.
This is not illegal per se.