After reading “What are investment contracts?”, read also “What is money laundering?“
-
An investment contract means 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.
-
An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits.
- A common enterprise is deemed created when two (2) or more investors pool their resources.
Rule 26 of the Implementing Rules and Regulations of the Securities Regulation Code provides for the fraudulent transactions in connection with the purchase or sale of any securities. To wit:
Rule 26.1. It shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to: (i) employ any device, scheme, or artifice to defraud; (ii) 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 (iii) engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person.
The law says:
Rule 26.3.5 par. 4 defines an investment contract as such:
An investment contract means 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. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits. (Underscoring supplied.)
A common enterprise is deemed created when two (2) or more investors pool their resources, even if the promoter receives nothing more than a broker’s commission. (Rule 26.3, 2015 SRC-IRR)
Jurisprudence says:
The requisites of an investment contract are the following:
- An investment of money;
- In a common enterprise;
- With expectation of profits
- “primarily” from the efforts of others.
The term “primarily” modifies the Howey Test which requires the profits to be derived “solely” from the efforts of others. (Power Homes Unlimited Corporation v. Prosperity.com, Inc., G.R. No. 164197, 25 January 2012)
In the case of Luis Juan Virata v. Alejandro Ng Wee (G.R. No. 220926, 5 July 2017), the Supreme Court held that a corporation offering what it purported to be “sans recourse” transactions wherein the investment house would allegedly match investors with pre-screened corporate borrowers in need of financial assistance, where prior to being matched with a corporate borrower, all the monies infused by the investors are pooled in an account maintained by the corporation, and the investors were induced to invest by corporation with promises of high yield, and where the profitability of the enterprise depended largely on whether or not corporation, on best effort basis, would be able to match the investors with their approved corporate borrowers is considered as an investment contract in the form of securities since it satisfies all the requisites of an investment contract.
Is a business plan involving the assignment of leasehold rights over lots and condotel units for a valuable consideration and the assignees will enroll the said units under a management contract wherein profits will be realized and remitted to the assignee on top of the guaranteed aggregate use of the leasehold rights considered as an investment contract?
Yes, such business plan and the transactions involved are considered as investment contracts that are securities under the Securities Regulations Code. What is involved is a scheme whereby a person invests his money in the common enterprise and is led to expect profits primarily through the efforts of others. The corporation is offering more than leasehold rights but also the opportunity to contribute money and to share in the profits of leasing condotel units managed and currently owned by the corporation. (SEC-OGC Opinion No. 11-49, 21 December 2011)
Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.
[email-subscribers-form id=”4″]