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Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.
AT A GLANCE:
An investment contract is 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. (2015 Implementing Rules and Regulations of the Securities Regulation Code)
The case of Power Homes Unlimited Corporation v. Securities Exchange Commission (G.R. No. 164182) traced the history of the concept of an investment contract under Republic Act No. 8799.
Our definition of an investment contract traces its roots from the 1946 United States (US) case of SEC v. W.J. Howey Co. The US Supreme Court established a test to determine whether a transaction falls within the scope of an “investment contract.” Known as the Howey Test, it requires a transaction, contract, or scheme whereby a person (1) makes an investment of money, (2) in a common enterprise, (3) with the expectation of profits, (4) to be derived solely from the efforts of others. Although the proponents must establish all four elements, the US Supreme Court stressed that the Howey Test 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 the money of others on the promise of profits. Needless to state, any investment contract covered by the Howey Test must be registered under the Securities Act, regardless of whether its issuer was engaged in fraudulent practices.
Therefore, to be a security subject to regulation by the SEC, an investment contract in our jurisdiction must be proved to be: (1) an investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) primarily from efforts of others.
How are Investment Contracts registered?
Republic Act No. 8799 or the Securities Regulation Code treats investment contracts as securities. Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character.
Section 8 of R.A. No. 8799 talks about the registration requirement of securities. It provides that:
Section 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. 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.
8.2. The Commission may conditionally approve the registration statement under such terms as it may deem necessary.
8.3. The Commission may specify the terms and conditions under which any written communication, including any summary prospectus, shall be deemed not to constitute an offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in Register Securities in which shall be recorded orders entered by the Commission with respect to such securities. Such register and all documents or information with the respect to the securities registered therein shall be open to public inspection at reasonable hours on business days.
8.5. The Commission may audit the financial statements, assets and other information of firm applying for registration of its securities whenever it deems the same necessary to insure full disclosure or to protect the interest of the investors and the public in general.
Clearly, the law requires investment contracts to be registered with the SEC before being distributed and sold. In one case, the Supreme Court noted that the purpose of this provision is to afford the public protection from investing in worthless securities. (Herbosa v. CJH Development Corporation, G.R. No. 210316)
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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries regarding legal services, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/ 0917-5772207/ 09778050020.
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