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When do
we consider a company to be involved in or dealing with
an investment contract that is considered as a security
and, thus, is required to be duly registered with the
Securities and Exchange Commission (SEC) prior to the
sale or offer for sale or distribution of the same to
the public?
Section
8.1 of RA 8799 provides that securities shall not be
sold or offered for sale or distribution within the
Philippines, without a registration statement (RS) duly
filed with and approved by the SEC. Prior to such sale
information on the securities, in such form and with
such substance as the Commission may prescribe, shall be
made available to each prospective purchaser.
What,
then, is an investment contract? In the light of all the
scams nowadays, it is appropriate that we clarify this
matter. An investment contract is defined as 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 others (Rule 3, 1 [G],
Amended Implementing Rules and Regulations of RA 8799).
The elements therefore are: 1) an investment of money;
2) in a common enterprise; 3) with expectation of
profits; and 4) primarily generated from the efforts of
others.
The 1946
case in United States of SEC v. W.J. Howey Co. is very
instructive. The US Supreme Court ruled that the use of
the catch-all term “investment contract” indicated a
congressional intent to cover a wide range of investment
transactions. This 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 money of others on the promise of
profits. This is known as the “Howey Test” and, thus,
any investment contract covered by the elements
enumerated in this test must be registered under the US
Securities Act.
In the
later case of SEC v. Glenn W. Turner Enterprises Inc.
et. al. (1973), the US Supreme Court again held that the
element that profits must come “solely” from the efforts
of others should not be given strict interpretation. It
ruled 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. It
ruled that the offer to sell to the public contracts
characterized as self-improvement courses may be
considered violations of securities laws if it can be
duly proved that the selling thereof would offer the
buyer the opportunity of earning commissions on the sale
of the contracts regardless of the fact that the buyers,
in addition to the investing of money needed to purchase
the said contract, were obliged to contribute their own
efforts in finding prospects and bringing them to sales
meetings. In other words, the efforts being considered
as “solely” exerted by the issuer can include the
recruitment of prospects to a presentation of the
product or sales meeting, because such recruitment by
the seller of the self-improvement course is not
considered in regard to the effort of generating the
profit or income contemplated by the law.
RA 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
expect profits not solely but primarily from the efforts
of others. Thus, to be a security subject to regulation
by the SEC by the filing of an RS, an investment
contract in our jurisdiction must be proved to be one in
accordance with the essential requisites provided for by
the Amended Implementing Rules of the SEC as herein
abovementioned.
Clearly,
therefore, RA 8799 has plugged the loopholes in those US
cases by widening the scope of coverage specifically
because there are many creative schemes that could
literally fall between the cracks if the interpretation
is left to a tribunal or court on a case-to-case basis.
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