The Financing Company ActRepublic Act 8556

1. Why is the law relevant to Corporate Finance?

Companies whether small, medium or large scale, requires cash and fixed assets in order to sustain its day to day operations. Aside from capital or equity investment, companies use debt financing as a mode of acquiring assets for immediate and long-term needs of the company. Although the commercial banking sector dominates the financial system, nonbank entities-such as finance companies, lending investors, mutual building and loan associations, venture capital companies, and nonstick savings and loan associations-do play a vital role in Philippine credit and capital formation. Finance companies and lending investors constitute the largest elements in the Philippine specialized commercial finance sector.

It allows them to engage in quasi banking, money market operations with approval from BSP. It allows them to issue capital instruments to tap new sources of funds. Thus, the Republic Act 8556, otherwise known as the Financing Company Act of 1998 was created in order to regulate financing companies, which are primarily organized for the purpose of extending credit to individuals, industrial, commercial or agricultural enterprises.

Such law is relevant, as corporate finance is the business of getting money from those who have it to lend or invest to companies that can put the money to work, for the law lays down the rights and powers which financing companies may exercise and liabilities which may be enforced against them. Also, the said law also lays down the mandatory requirements for organization and registration of financing companies, which serves as a guide for compliance not for the finance companies.

2. What are the most significant provisions of law?

One of the most significant provisions of the law are found in the Rights and Powers of the Financing companies. These are the following:

Financing companies shall have the following powers, in addition to those granted by this Act and by other laws:

"(a) Engage in quasi-banking and money market operations with the prior

approval of the Bangko Sentral ng Pilipinas;

"(b) Engage in trust operations subject to the provisions of the General

Banking Act upon prior approval by the Bangko Sentral ng Pilipinas;

"(c) Issue bonds and other capital instruments subject to pertinent rules

and regulations of the Bangko Sentral ng Pilipinas;

"(d) Rediscount their paper with government financial institutions subject

to relevant laws, rules and regulation;

"(e) Participate in special loan or credit programs sponsored by or made

available through government financial institutions; and

"(f) Provide foreign currency loans and leases to enterprises who earn

foreign currency by exports or other means, subject to existing laws and

rules and regulations promulgated by the Bangko Sentral ng Pilipinas.

a. Policy considerations

The Financing Act of 1998 is the law which regulate and promote the activities of financing and leasing companies to place their operations on a sound, competitive, stable and efficient basis as other financial institutions. It is enacted to curtail and prevent acts or practices prejudicial to the public interes so that they may be in a better position to extend efficient service in fair manner to the general public and to industry, commerce and agriculture and thereby more fully contribute to the sound development of the national economy.

b. Relevant/salient defined terms

The following are the relevant/salient terms of the law:

"(a) 'Financing companies' hereinafter called companies, are corporations, except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property;

(b) 'Securities and Exchange Commission' shall mean the office of the Securities and Exchange Commission of the Philippines;

(c) 'Credit' shall mean any loan, mortgage, financial lease, deed of trust, advance or discount, any conditional sales contract, contract to sell, or sale or contract of sale of property or service, either for present or future delivery, under which, part of all or the price is payable subsequent to the making of such sale or contract; any contract, any option, demand, lien or pledge, or to the other claims against, or for the delivery of, property or money, any purchase, or other acquisition of or any credit upon the security of, any obligation or claim arising out of the foregoing, and any transaction or series of transactions having similar purpose or effect;

(d) 'Financial leasing' is a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the instance of the lessee, machinery, equipment, motor vehicles, appliances, business and office machines, and other movable or immovable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory period of not less than two (2) years during which the lessee has the right to hold and use the leased property with the right to expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.

(e) 'Purchase discount' is the difference between the value of the receivable purchased or credit assigned, and the net amount paid by the finance company for such purchases or assignment, exclusive of fees, services, charges, interest and other charges incident to the extension of credit.

(f) 'Lease rentals' shall refer to the periodic payments made by the lessee to the lessor under Sec. 3(d), above."

(g) Receivable financing is a mode of extending credit through the purchase by, or assignment, to, a financing company of evidence of indebtedness or open accounts by discounting or factoring;

(h) Discounting is a type of receivables financing whereby evidence of indebtedness of a third party such as installment contracts, promissory notes, and similar instruments, are purchased by, or assigned to, a financing company in an amount or for a consideration less than their face value.

(i) Factoring is a type of receivables financing whereby open accounts, not evidenced by a written promise to pay supported by documents such as but not limited to invoices of manufacturers and suppliers, delivery receipts and similar documents are purchased by or assigned to a financing company in an amount or for a consideration less than the outstanding balance of open accounts.

(j) Paid-up capital refers to the amount paid for the subscription of stock of a corporation including the amount paid in excess of par value.

(k) Networth is the excess of assets over liabilities, net of appraisal surplus, unbooked valuation reserves, capital adjustments, overstatement of assets and unrecorded liabilities.

c. Who enforces the law?

The Securities and Exchange Commission is hereby empowered to enforce the provisions implementing regulations except insofar as the Bangko Sentral may have supervisory authority under the provisions of Republic Act No. 7653 with respect to financing companies licensed to perform quasi-banking functions, and insofar as the Monetary Board has authority to prescribe financing company rates and charges under Sec. 5 hereof."

Also, the Monetary Board of the Bangko Sentral ng Pilipinas is hereby empowered to prescribe, in consultation with financing companies and the Securities and Exchange Commission, the maximum rate or rates of purchase discounts, lease rentals, fees, service and other charges of financing companies, and to change, eliminate or grant exemptions from or suspend the effectivity of such rules whenever warranted by prevailing economic and social conditions."

d. Who are affected by the law?

The financing companies, debtors, creditors are the persons affected by the law. Also, the following are affected by the law:

a. Financing and leasing companies;

b. Purchaser, importer, borrower or other eligible person in connection

with any purchase, importation, acquisition, or other transaction;

c. medium and long-term credit to small and medium enterprises;

d. third person or entity in connection with liability for loss, damage or

injury caused by a motor vehicle, aircraft, vessel, equipment, machinery or

other property leasede. Reportorial/registration requirements

Aside from requiring compliance with the provisions of the Corporation Code, the Securities and Exchange Commission shall not register the articles of incorporation of any financing company unless its office is satisfied on the evidence submitted to it, that:

"(a) All the requirements of existing laws to engage in the business for which the applicant is proposed to be incorporated or organized have been complied with;

"(b) The organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the protection of the interest of the general public;

"(c) All the requirements of this Act have been complied with: Provided, That financing companies duly incorporated or registered prior to the approval of this Act, and which are actually existing and operating as such, shall file an information sheet with the Securities and Exchange Commission in the form to be prescribed by the Securities and Exchange Commission within sixty (60) days after notice from the said Commission. No person, association, partnership, or corporation shall hold itself out as doing business as a 'financing company' or 'finance and investment company' or any other title or name tending to give the public the impression that it is engaged in the operations and activities of a financing company, unless so authorized under this Act."

Also, registration papers to be required to be submitted to the Commission, which provides that any stock corporation may be registered as a financing company by filing with the Commission five (5) copies of an application to operate as a financing company under R.A. 8556, signed under oath by its President, together with the following documents in the prescribed forms:

1. All documents required for registration as a corporation;

2. Information Sheet of registrant company;

3. Personal Information Sheet of each of the directors, officers with the

rank of Vice-President and up or their equivalent or managing partners;

4. Answer to the questionnaire of the Commission;

5. Documents required of each Filipino director, officer to be appointed

from the rank of Vice-President and up or their equivalent, such as the

following:

i. Police clearance from local police of the city or municipality of

which he is a resident;

ii. NBI clearance;

iii. Certificate of good moral character to be executed under oath by

at least (2) reputable and disinterested persons in the community;

and

iv. Bank credit information to be issued by his depository or creditor

bank(s), if any;

In lieu of Items (ii) and (iii), a foreign director or officer shall submit a

clearance from the Bureau of Immigration and Deportation and

photocopies of passport and Alien Certificate of Registration (ACR).

6. Clearance from the Bangko Sentral ng Pilipinas, if the applicant

financing company is a subsidiary or affiliate of a bank and/or non-bank

financial institution with quasi-banking license.

7. Such other documents as may be required by the Commission;

b. Publication of Notice and Order

Upon receipt of the above registration papers of a proposed financing company, the Commission shall cause the Notice and Order to be published by the applicant company at its expense in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks. The Notice and Order shall state, among others, the name of the proposed financing company, the capital structure, and the names and residences of its directors.

c. Opposition to Registration

Any interested party may oppose the registration of a financing company in writing, personally or through counsel, within fifteen (15) days after the last date of the publication of the Notice and Order. If the Commission finds that the requirements of R.A. 8556, its implementing rules and regulations and other pertinent laws have been complied with and that no valid reason exists for the disapproval of the application, the Commission shall issue a Certificate of Authority to Operate as a Financing Company.

Furthermore, the requires that every financing company shall file with the Commission the following reports:

a. Within forty-five (45) days from the end of each fiscal quarter, a quarterly report which shall include:

1. Statement of Condition as of the end of the most recent fiscal quarter

and Statement of Income and Expenses for the period between the end of

the preceding fiscal year and the end of the most recent fiscal quarter;

2. Schedule of aging of receivables (indicate the maturity pattern of the

receivables classified under [i] due within 1 year, [ii] due over 1 year;

Receivables due within one year should further be broken down into

current and past due accounts; Past due accounts are to be subdivided

further into [i] within 1 year past due, [ii] past due for over 1 year and [iii]

accounts under litigation. Provided, however, that respective collateral(s),

if any, for accounts over one year past due and accounts under litigation

shall be adequately disclosed in the schedule;

3. Schedule of liabilities (identify the creditors and indicate the same

maturity pattern required for the Schedule of Aging of Receivables);

4. List of officers, directors and stockholders.

b. Within one hundred twenty (120) days after the end of the fiscal year, five copies of the audited financial statements;

c. Any change in the membership or composition of the board of directors, officers from the rank of vice president and up or their equivalent, branch manager, cashier and administrative officer shall be reported to the Commission within seven (7) working days thereafter, and the requirements prescribed under Section 4 (a) (3) and (5) and Section 6 (a) (3) and (4) hereof shall be submitted within thirty (3) working days from date of the aforesaid change;

d. Such other reports as the Commission may require;

e. Such other reports as the Bangko Sentral ng Pilipinas may require.

The reports shall be signed under oath by the company's principal executive officer and principal financial officer.

3. Applicable Case LawsPCI LEASING AND FINANCE, INC., vs. UCPB GENERAL INSURANCE CO., INC.

G.R. No. 162267

July 4, 2008

FACTS:

Flavino Isaac was driving a Mistubishi Lancer car insured with UCPG General Insurance Co., was hit and bumped by an 18-wheeler Fuso Tanker Truck, driven by Renato Gonzaga, employee of defendant-appellant Superior Gas and Equitable Co., Inc. (SUGECO) which the truck was leased and owned by defendants-appellants PCI Leasing and Finance Inc.

The impact caused heavy damage to the Mitsubishi Lancer Car resulting ina an explosion of the rear part of the car and the driver and passenger suffered physical injuries. However, the driver defendant-appellant Gonzaga continued its way to its destination and did not bother to bring his victims to the hospital.

As the 18-wheeler truck is registered under the name of PCI Leasing, repeated demands were made by plaintiff-appellee for the payment of the aforesaid amounts. However, no payment was made.

PCI Leasing and Finance, Inc., (petitioner) interposed the defense that it could not be held liable for the collision, since the driver, Gonzaga, was not its employee, but that of its co-defendant SUGECO. In fact, it was SUGECO, that was the actual operator of the truck, pursuant to a Contract of Lease signed by petitioner and SUGECO. Petitioner, however, admitted that it was the owner of the truck in question. RTC rendered judgment in favor of UCPB General Insurance and ordered PCI Leasing and Gonzaga, to pay jointly and severally the former. CA affirmed with the lower courts decision.

ISSUE:

Whether or not petitioner, as a financing company, is absolved from liability by the enactment of Republic Act (R.A.) No. 8556, or the Financing Company Act of 1998

HELD: No. The court held that the new law, R.A. No. 8556, notwithstanding developments in foreign jurisdictions, do not supersede or repeal the new law on compulsory motor vehicle registration. No part of the law expressly repeals Section 5(a) and (e) of R.A. No. 4136, as amended, otherwise known as the Land Transportation and Traffic Code, to wit:Sec. 5. Compulsory registration of motor vehicles. - (a) All motor vehicles and trailer of any type used or operated on or upon any highway of the Philippines must be registered with the Bureau of Land Transportation (now the Land Transportation Office, per Executive Order No. 125, January 30, 1987, and Executive Order No. 125-A, April 13, 1987) for the current year in accordance with the provisions of this Act.

x x x x (e) Encumbrances of motor vehicles. - Mortgages, attachments, and other encumbrances of motor vehicles, in order to be valid against third parties must be recorded in the Bureau (now the Land Transportation Office). Voluntary transactions or voluntary encumbrances shall likewise be properly recorded on the face of all outstanding copies of the certificates of registration of the vehicle concerned.Cancellation or foreclosure of such mortgages, attachments, and other encumbrances shall likewise be recorded, and in the absence of such cancellation, no certificate of registration shall be issued without the corresponding notation of mortgage, attachment and/or other encumbrances.x x x x (Emphasis supplied)Neither is there an implied repeal of R.A. No. 4136. As a rule, repeal by implication is frowned upon, unless there is clear showing that the later statute is so irrevocably inconsistent and repugnant to the existing law that they cannot be reconciled and made to stand together. There is nothing in R.A. 4136 that is inconsistent and incapable of reconciliation.

Thus, the rule remains the same: a sale, lease, or finance lease, for that matter, that is not registered with the Land Transportation Office, still does not bind third persons who are aggrieved in tortuous incidents, for the latter need only to rely on the public registration of a motor vehicle as conclusive evidence of ownership. A lease such as the one involved in the instant case is an encumbrance in contemplation of law, which needs to be registered in order for it to bind third parties. Under this policy, the evil sought to be avoided is the exacerbation of the suffering of victims of tragic vehicular accidents in not being able to identify a guilty party. A contrary ruling will not serve the ends of justice. The failure to register a lease, sale, transfer or encumbrance, should not benefit the parties responsible, to prejudice innocent victims.

The non-registration of lease contract between petitioner and its lessee precludes the former from enjoying the benefits under Section 12 of R.A. No. 8556.

Cebu Contractors Consortium Co., vs. Court of Appeals and Makati Leasing & Finance Corporation

G.R. No. 107199

July 22, 2003

FACTS:

Makati Leasing and Finance Corporation (MLFC) and Cebu Contractors Consortium Company (CCCC) entered into a lease agreement relating to various equipment was entered into between MLFC, as lessor, and CCCC, as lessee. The terms and conditions of the lease were defined in said agreement and in two lease schedules of payment. To secure the lease rentals, a chattel mortgage, and a subsequent amendment thereto, were executed in favor of MLFC over other various equipment owned by CCCC.

CCCC began defaulting on the lease rentals, prompting MLFC to send demand letters. When the demand letters were not heeded, MLFC filed a complaint for the payment of the rentals due and prayed that a writ of replevin be issued in order to obtain possession of the equipment leased and to foreclose on the equipment mortgaged.

For its part, CCCC alleges that it had a contract with the then Ministry of Public Highways for the construction of the Iligan-Cagayan de Oro-Butuan Road. Being in need of additional capital, it approached MLFC for the purpose of securing a loan. MLFC agreed to extend financial assistance to CCCC but, instead of a customary loan covered by a security, MLFC induced CCCC to adopt and apply a sale and lease back scheme. The rentals will be treated as installment payments to repurchase the equipment. It is CCCCs claim that the arrangement is nothing more than an equitable mortgage.

CCCs position is that it is no longer indebted to MLFC because the total amounts collected by the latter from the Ministry of Public Highways, by virtue of the deed of assignment, and from the proceeds of the foreclosed chattels were more than enough to cover CCCCs liabilities. Finally, CCCC submits that, in any event, the deed of assignment itself already freed CCCC from its obligation to MLFC. The Trial Court found CCC liable and in the CA, reversed the decision of the Trial Court.

ISSUE:

Whether or not the respondent court erred in upholding the so-called sale-lease-back scheme of the private respondent when the same is in reality nothing but an equitable mortgage?

HELD:

It is clear that the transaction between CCCC and MLFC is what is popularly known as a "financial leasing" or "financing lease." Transactions of this sort are not new to the commercial world and have been recognized as genuine or legitimate contracts, accorded with statutory and administrative recognition. In Beltran v. PAIC Finance Corporation, this Court had occasion to discuss the nature of a financing lease: A financing lease may be seen to be a contract sui generis, possessing some but not necessarily all the elements of an ordinary or civil law lease. Thus, legal title to the equipment leased is lodged in the financial lessor. The financial lessee is entitled to the possession and use of the leased equipment. At the same time, the financial lessee is obligated to make periodic payments denominated as lease rentals, which enable the financial lessor to recover the purchase price of the equipment which had been paid to the supplier thereof.

In Investors Finance Corporation v. Court of Appeals, the Court, applying the definition of financial leasing, differentiated between a true financial leasing and an ordinary loan with mortgage in the guise of a lease. It was explained that the definition contemplates the extension of credit to assist a buyer in acquiring movable property which he can use and eventually own. Thus, in a true "financial leasing," a finance company purchases on behalf of or at the instance of the lessee the equipment which the latter is interested to buy but has insufficient funds for the purpose. The finance company therefore leases the equipment to the lessee in consideration of the periodic payment by the lessee of a fixed amount of "rental." However, where the client already owns the equipment but needs additional working capital and the finance company purchases such equipment with the intention of leasing it back to him, the lease agreement is simulated to disguise the true transaction that is a loan with security. In that instance, it is clear that the intention of the parties was not to enable the client to acquire and use the equipment, but to extend to him a loan.

The Lending Company Regulation Act (RA 9474)

1. Why is this law relevant to Corporate Finance?

Every decision made in a business has financial implications, and any decision that involves the use of money is a corporate financial decision. Everything that a business does fits under the rubric of corporate finance. Furthermore, it may also be a business of getting money from those who have it to lend or invest to companies that can put their money to work.

The law is relevant to corporate finance since it lays down the laws and rules that regulate the establishment of lending companies and to place their operation on a sound, efficient and stable condition to derive the optimum advantages from them as an additional source of credit.

2. What are the most significant provisions of the law?

a) Policy considerations

The law is consistent with the declared policy of the State to regulate the establishment of lending companies and to place their operation on a sound, efficient and stable condition to derive the optimum advantages from them as an additional source of credit; to prevent and mitigate, as far as practicable, practices prejudicial to public interest; and to lay down the minimum requirements and standards under which they may be established and do business.

b) Relevant/Salient defined terms

The definition of terms and its Implementing Rules and Regulations provide for the following important terms:

(a) Lending Company - shall refer to a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than nineteen (19) persons. It shall not be deemed to include banking institutions, investment houses, savings and loan associations, financing companies, pawnshops, insurance companies, cooperatives and other credit institutions already regulated by law. The term shall be synonymous with lending investors.

(b) Debtor - shall refer to a borrower or person granted a loan by the lending company.(c) Quasi-Bank - shall refer to a non-bank financial institution authorized by the BSP to engage in quasi-banking functions and to borrow funds from more than nineteen (19) lenders through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes as defined in Sec. 95 of Republic Act No. 7653 (the :New Central Bank Act:) for purposes of relending or purchasing of receivables and other obligations.

(d) Subsidiary - shall refer to a corporation more than fifty percent (50%) of the voting stock of which is owned by a bank or quasi-bank.(e) Affiliate - shall refer to a corporation, the voting stock of which, to the extent of fifty percent (50%) or less, is owned by a bank or quasi-bank which is related or linked to such institution through common stockholders or such other factors as may be determined by the Monetary Board of the BSP.

(f) SEC - shall refer to the Securities and Exchange Commission.(g) BSP - shall refer to the Bangko Sentral ng Pilipinas.

(h) Certificate of Authority (CA) - shall refer to a certificate issued by the SEC in favor of a lending company to engage in the business of lendingregulated by R.A. No. 9474 and its Implementing Rules and Regulations.

(i) Branch Office - shall include an extensionoffice, unit, satellite office, etc. of a lending company with a Certificate of Authority to operate as such.

(j) Charges on loan - shall refer to agreed upon interestrate, service charge, penalty, discount, and such other charges incidental to lending activity.

(k) Monetary Assets - shall refer to total assets inclusive of valuation reserves and deferred income but shall not include investments in real estate, inshares of stock of real estate developmentcorporations or in real estate based projects,leasehold rights and improvements, fixed assets, foreclosed properties and prepayments.

(l) Networth - shall refer to the excess of assetsover liabilities, net of appraisal surplus, unbookedvaluation reserves, capital adjustments,overstatement of assets and unrecorded liabilities.c) Who enforces the law?

The authority who may properly enforce this law shall be the Securities and Exchange Commission with the supervision and examination of the Bangko Sentral ng Pilipinas in accordance with Republic Act No. 7653, in cases where lending companies are subsidiaries and affiliates of banks and quasi-banks. Provider further, That the Monetary Board, after being satisfied that there is reasonable ground to believe that a lending company is being used as a conduit by a bank, quasi-bank or their subsidiary/affiliate to circumvent or violate BSP rules and regulations, may order an examination of the lending companys books and accounts.

The Securities and Exchange Commission is hereby authorized to:

(a) Create a new division or bureau within its control to regulate and supervise the operations and activities of lending companies in the country;

(b) Issue rules and regulations to implement the provisions contained herein;

(c) Issue rules and regulations on, among other things, minimum capitalization, uses of funds received, method of marketing and distribution, maturity of funds received, restrictions or outright prohibition of purchases or sales of receivables with or without recourse basis;

(d) Require from lending companies reports of condition and such other reports necessary to determine compliance with the provisions of this Act;

(e) Exercise visitorial powers whenever deemed necessary; and

(f) Impose such administrative sanctions including suspension or revocation of the lending companys authority to operate and the imposition of fines for violations of this Act and regulations issued by the SEC in pursuance thereto.

d) Who are affected by the law?

The law is consistent with the declared policy of the State to regulate the establishment of lending companies and to place their operation on a sound, efficient and stable condition to derive the optimum advantages from them as an additional source of credit; to prevent and mitigate, as far as practicable, practices prejudicial to public interest; and to lay down the minimum requirements and standards under which they may be established and do business.

The ones primarily affected by the law are the lending companies .However, equally affected are the Quasi-banks, Affiliates and persons who are granted loans by lending companies.

It is also provided that a fine of not less than Ten Thousand Pesos (P10,000.00) and not more than Fifty thousand pesos(P50,000.00) or imprisonment of not less than six months but not more than ten (10) years or both, at the discretion of the court, shall be imposed upon the following persons:1. Any person who shall engage in the business of a lending company without a validly subsisting authority to operate from the Sec.2. The president, treasurer and other officers of the corporation, including the managing officer thereof, who shall knowingly and willingly:a. Engage in the business of a lending company without a validly subsisting authority to operate from the SEC;b. Hold themselves out to be a lending company, either through advertisement in whatever form, whether in its stationery, commercial paper, or other document, or through other representations without authority;c. Make use of a trade or firm name containing the words lending company or lending investor or any other designation that would give the public the impression that it is engaged in the business of a lending company as defined in this Act without authority; andd. Violate the provisions of this Act.3. Any officer, employee, or agent of a lending company who shall:a. Knowingly and willingly make any statement in any application, report, or document required to be filed under this Act, which statement is false or misleading with respect to any material fact; andb. Overvalue or aid in overvaluing any security for the purpose of influencing in any way the action of the company in any loan, or discounting line.4. Any officer, employee or examiner of the SEC directly charged with the implementation of this Act or of other government agencies who shall commit, connive, aid, or assist in the commission of acts enumerated under Subsections 1 and 2 of this Sec.

e) Reportorial/registration requirements

Requirements for Organization

(a) Form of Organization

A lending company shall be established as a stock corporation.

i. Existing Lending Companies organized as single proprietorships or partnerships shall,within a period of one (1) year from the effectivity of the Act, organize themselves as a stock corporation with the minimum capitalization prescribed under the Act andsecure a Certificate of Authority to operate a lending company. Otherwise, they shall be disallowed from engaging in the business of granting loans to the public.

ii. The words Lending Company or LendingInvestor or any other word descriptive of its primary activity of granting loans to the public except words commonly used to identify financing companies shall always be included in the corporateand trade name.

(b) Requirements for Securing an Authority A lendingcompany shall file with SEC four (4) copies of a dulyaccomplished application form to operate as a lendingcompany, signed under oath by the President, togetherwith the following documents in the prescribed form:

i. Information Sheet;

ii. NBI clearance of each director/officer;

iii. Foreign directors/officers, in addition to the NBIClearance, shall submit a clearance from the Bureau of Immigration (BI), a photocopy of his passport showing a valid visa or stay in the Philippines, ACR i-card, and a work permit issued by theDepartment of Labor and Employment;

iv. Presidents Sworn Statement and Undertakingthat the corporation will not accept or solicitinvestments, other than loans, from more than 19 persons without SEC approval, and uponpresentation of valid claims, it shall immediatelyindemnify or return the investments of persons from said unauthorized public solicitation of funds; moreover, the sworn statement shall likewise contain an undertaking that the country or state of the foreign applicantallows Filipino citizens and corporations to do lending business therein.

v. For an existing lending investor applying for aCertificate of Authority, it shall submit an external auditors sworn statement and undertakingthat based on his/her examination of the corporatebooks of accounts and other related records of thecorporation, it has not accepted or solicitedinvestments, other than loans, from more than19 persons without prior compliance with Sections 8 and 12 of the Securities Regulation Code and its Amended Implementing Rules and Regulations.

vi. Business plan including method of marketing itsproduct and sources of the funds and maturities of credit; and

vii. Statement of its compliance with Rule 17.1(2)(A)(i) and (ii) of the Amended ImplementingRules and Regulations of the Securities Regulation Code.

(c) Branches, Extension or Satellites Offices or Units.

i. Loan transactions shall be booked in theauthorized offices of the lending company;

ii. No lending company shall establish or operate a branch, extension office or unit or satellite office without priorapproval by the SEC. The followingdocuments shall be submitted for theopening of a branch office:

1) Information Sheet on the proposed branch;

2) NBI clearance of the manager, cashierand administrative officer of the proposedbranch;

iii. The Certificate of Authority to operate a branch, extension office, unit or satellite office shall be coterminous with that of the Head Office.

(d) Licensing Fees:

i. Initial Application Fees shall be paid to SECat the time of filing of application

1) Head Office A fee of 1/10 of 1% of the paid-upcapital of the lending company shall be paid for the issuance of a Certificate of Authority to Operate as a LendingCompany.

2) Branch, extension office, unit or satellite office A fee of 1/10 of 1% of the assignedcapital of the branch, extension office, unit or satellite office shall likewisebe paid for the issuance of an original Certificate of Authority.

ii. Annual fee An annual fee shall be paid not later than fortyfive (45) days before the anniversary date of the CA.

1) Head Office 1/8 of 1% of the required paid-up capital

2) Branch Office 1/8 of 1% of the required paid-up capital

(e) Commencement of Operations

A corporation/company that has been duly registeredand granted a Certificate of Authority to operate as a LendingCompany shall commence operations within one hundred twenty (120) days from date of grant of such authority.

Failure to commence operations within said period shall bea ground for the suspension of its CA.

(f) Lending Companies shall use at least 51% of their funds for direct lending purposes.

(g) The total investment of a lending company in realestate and in shares of stock in a real estate developmentcorporation and other real estate based projectsshall not at any time exceed twenty-five (25%) percent of its networth.

Required Capital

The minimum paid in capital of any lending company which may be established after the effectivity of this Act shall be One million pesos (P1,000,000.00):Provided,however, That lending companies established and in operation prior thereto shall comply with the minimum capitalization required under the provisions of this Section within such time as may be prescribed by the SEC which time shall, in no case, be less than three years from the date of effectivity of this Act and:Provided,further, That the SEC may prescribe a higher minimum capitalization if warranted by circumstances.

Citizenship Requirement

At least a majority of the voting capital stock shall be owned by citizens of the Philippines. The percentage of foreign-owned voting stock in any lending company existing prior to the effectivity of this Act, if such percentage is in excess of forty-nine percent (49%) of the voting stock, shall not be increased but may be reduced and, once reduced, shall not be increased thereafter beyond forty-nine percent (49%) of the voting stock of the lending company. The percentage of foreign-owned voting stocks in any lending company shall be determined by the citizenship of the individual stockholders. In the case of corporations owning shares in a lending company, the citizenship of the individual owners of voting stock in such corporations shall be the basis in the computation of the percentage.

No foreign national may be allowed to own stock unless the country of which he is a national accords reciprocal rights to Filipinos.

Every lending company shall maintain books of accounts and records as may be required by the SEC and prescribed by the Bureau of Internal Revenue and other government agencies. In case a lending company engages in other businesses, it shall maintain separate books of accounts for these businesses.Maintenance of Books of Accounts and Records

The Manual of Accounts prescribed by the BSP for lending investors shall continue to be adopted by lending companies for uniform recording and reporting of their operations, until a new Manual of Accounts shall have been prescribed by the Sec.

It shall issue the appropriate instruments and documents to the parties concerned to evidence its lending and borrowing transactions.

Lending companies shall file with theSEC the following reports / manuals in accordance with the following schedules:Kind of report / manualDue Date

General Information Sheet (GIS)Within thirty (30) days from annual meeting, as stated in its SEC approved bylaws

Audited Financial Statements prepared by an external auditor accredited by the SECWithin One Hundred Twenty (120) days from end of fiscal year, as stated in its SEC approved bylaws

Special Forms for Financial Statements in Electronic FormatWithin thirty (30) days from the last day of submission of the annual Audited Financial Statements

Interim semi-annual financial statements (using Special Form) including the following:

Balance Sheet;

Income and Expense statement;

Cash flow

Statement of Changes in Equity

Schedule of Liabilities

List of Directors and Officers

Aging of ReceivablesEvery July 15 and January 15

3.Applicable case laws.SEC ADMINISTRATIVE CASE NO. 09-11-135IN THE MATTER OF DNK LENDING & TRADING CORPORATION

DNK Lending was incorporated on 29 April 1991 primarily to engage in the business of lending money to the public. On 22 May 2007, R.A. 9474 was passed and signed into law mandating that all companies engaged in lending activities or business shall secure a Certificate of Authority (CA) from the SEC.Notwithstanding the passage of R.A. 9474, DNK continued to operate without first securing the necessary CA. A perusal of DNK Lending's Audited Financial Statements shows that it has Assets in the form of Loans Receivable in the following amounts from 2006 to 2009. Moreover, DNK secured a business permit to engage in lending activities in 2009. Notwithstanding, DNK Lending did not take heed of SECs letter dated 20 January 2011 and Order dated 21 June 2011 to secure a CA and to pay a fine of P22,300.00.DNK continuously failed to submit its General Information Sheets since 1996 and its Financial Statements since 2010, among other reports required by the SEC.Given the foregoing, there is sufficient ground to revoke the Certificate of Registration issued to DNK Lending pursuant to Sec. 6 pars. (l) (3) and (6) of PD 902-A.SAMUEL U. LEE and PAULINE LEE and ASIATRUST DEVELOPMENT BANK, INC., petitioners, vs. BANGKOK BANK PUBLIC COMPANY, LIMITED, respondent.

the SEC was also covered by the Lending Company Regularization Act of 2007 (RA 9474)It must be noted that at the time the Consolidated Petition for the Declaration of a State of Suspension of Payments and for Appointment of a Management Committee/Rehabilitation Receiver was filed before the SEC on February 16, 1998 by MDEC, MHI, and three other corporations owned by the Lee family, Batas Pambansa Blg. (BP) 178 or the then Revised Securities Act was the primary governing law along with Presidential Decree No. (PD) 902-A, as amended, and the Corporation Code of the Philippines. Pertinently, among others, the SEC was also covered by the Investment House Law (PD 129), the Financing Company Act under Republic Act No. (RA) 2626, the Foreign Investments Act (RA 7042), and the Liberalized Foreign Investments Act (RA 8179). And subsequent to the filing of the instant case, the Securitization Act of 2004 (RA 9267) and the Lending Company Regularization Act of 2007 (RA 9474) were also enacted.PD 902-A, 34 however, was further amended by RA 8799 or the Securities Regulation Code, approved on July 19, 2000 by President Joseph Estrada. 35 Under Sec. 5.2 of RA 8799, 36 the SEC's original and exclusive jurisdiction over all cases enumerated under Sec. 5 of PD 902-A 37 was transferred to the appropriate RTC. RA 8799, Sec. 5.2, however, expressly stated as an exception, that the "[t]he Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of 30 June 2000 until finally disposed." Accordingly, the Consolidated Petition for the Declaration of a State of Suspension of Payments and for Appointment of a Management Committee/Rehabilitation Receiver filed on February 16, 1998 by MDEC, MHI and three other corporations owned by the Lee family, remained under the jurisdiction of the SEC until finally disposed of pursuant to the last sentence of Sec. 5.2 of RA 8799.SEC ADMINISTRATIVE CASE NO. 01-12-141IN THE MATTER OF MITA LENDING INVESTOR

Mita Lending is a partnership duly registered with the SEC on 08 January 1999 under SEC Registration No. A199900202. As indicated in the purpose clause of its Articles of Partnership, Mita Lending is engaged in lending activities. On 22 May 2007, R.A. 9474 was passed and signed into law mandating that all companies engaged in lending activities or business shall secure a Certificate of Authority (CA) from the SEC.Notwithstanding the passage of R.A. 9474, Mita Lending continued to operate without first securing the necessary CA.Rule 3 (a) (i) of the Implementing Rules and Regulations of R.A. 9474 requires existing lending companies organized as partnership, as in the case of Mita Lending, to organize itself as a stock corporation with the prescribed minimum capitalization and to secure a Certificate of Authority to operate as a lending company.From the foregoing, it has been established that Mita Lending continues to engage in the lending business without the required Certificate of Authority. Being a partnership, Mita Lending has been in violation of Section 4 of R.A. 9474, which mandates all entities engaged in lending activities or business to incorporate as a stock corporation and to secure a Certificate of Authority from the Commission. Thus, the continued operation of Mita Lending without the requisite Certificate violates R.A. 9474 and may cause injury or fraud to the investing public.

The Securities Regulation Code and its Implementing Rules and Regulations

(Republic Act No. 8799)

I. WHY IS THIS LAW RELEVANT TO CORPORATE FINANCE?

The mission of the Securities and Exchange Commission is to strengthen the corporate and capital market infrastructure of the Philippines, and to maintain a regulatory system, based on international best standards and practices, that promotes the interests of investors in a free, fair and competitive business environment.

The Securities Regulation Code is relevant to corporate finance because it one of the statutes that was enacted to provide for the powers and function of the Securities and Exchange Commission. Also, it provides on how the SEC will effectively regulate and monitor operations of the capital markets and widely disseminate reliable information for the protection of the investing public.II. WHAT ARE THE MOST SIGNIFICANT PROVISIONS OF THE LAW?

A. Policy Considerations

The following are the states policies consideration in enacting this law. The State shall:

establish a socially conscious, free market that regulates itself,

encourage the widest participation of ownership in enterprises,

enhance the democratization of wealth, promote the development of the capital market,

protect investors,

ensure full and fair disclosure about securities,

minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market.

Any doubt in the interpretation of these Rules (Implementing Rules and Regulation of RA 8799) shall be resolved by the Commission in a manner which would achieve the following ends as enumerated above.

B. Relevant/Salient Defined Terms

The following are the relevant salient terms defined in the Securities Regulation Code as expounded in its related implementing rules and regulations:

1. Subjects and/or Articles

a. "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. It includes:

Shares of stocks, bonds, debentures, notes evidences of indebtedness, asset-backed securities;

Investment contracts, certificates of interest or participation in a profit sharing agreement, certifies of deposit for a future subscription;

Fractional undivided interests in oil, gas or other mineral rights;

Derivatives like option and warrants;

Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments

Proprietary or nonproprietary membership certificates in corporations; and

Other instruments as may in the future be determined by the Commission.

b. "Uncertificated security" is a security evidenced by electronic or similar records.

c. "Pre-need plans" are contracts which provide for the performance of future services of or the payment of future monetary considerations at the time actual need, for which plan holders pay in cash or installment at stated prices, with or without interest or insurance coverage and includes life, pension, education, interment, and other plans which the Commission may from time to time approve.

d. "Prospectus" is the document made by or an behalf of an issuer, underwriter or dealer to sell or offer securities for sale to the public through registration statement filed with the Commission.

e. "Registration statement" is the application for the registration of securities required to be filed with the Commission.

2. Parties and/or Persons

a. "Issuer" is the originator, maker, obligor, or creator of the security.

b. "Broker" is a person engaged in the business of buying and selling securities for the account of others.

c. "Dealer" means many person who buys sells securities for his/her own account in the ordinary course of business.

d. "Associated person of a broker or dealer" is an employee therefor whom, directly exercises control of supervisory authority, but does not include a salesman, or an agent or a person whose functions are solely clerical or ministerial.

e. "Clearing Agency" is any person who acts as intermediary in making deliveries upon payment effect settlement in securities transactions.

f. "Exchange" is an organized market place or facility that brings together buyers and sellers and executes trade of securities and/or commodities.

g. "Insider" means (a) the issuer; (b) a director or officer (or any person performing similar functions) of, or a person controlling the issuer; gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) A government employee, director, or officer of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any forgoing insiders.

h. "Promoter" is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor.

i. "Salesman" is a natural person, employed as such as an agent, by a dealer, issuer or broker to buy and sell securities.

j. "Underwriter" is a person who guarantees on a firm commitment and/or declared best effort basis the distribution and sale of securities of any kind by another company.

C. Who Enforces the Law?

1. The Securities and Exchange Commission

This Code shall be administered by the Security and Exchange Commission (hereinafter referred to as the "Commission") as a Collegial body, composed of a chairperson and (4) Commissioners, appointed by the President for a term of (7) seven years each and who shall serves as such until their successor shall have been appointed and qualified.

The chairperson is chief executive officer of the Commission. The Chairperson shall execute and administer the policies, decisions, orders and resolutions approved by the Commission and shall have the general executive direction and supervision of the work and operation of the Commission and its members, bodies, boards, offices, personnel and all its administrative business.

The Commission may, for purposes of efficiency, delegate any of its functions to any department of office of the Commission, an individual Commissioner or staff member of the Commission except its review or appellate authority and its power to adopt, alter and supplement any rule or regulation.

2. The SECs Power and Responsibilities

The commission shall act with transparency and shall have the powers and functions provided by this code, Presidential Decree No. 902-A, the Corporation Code, the Investment Houses law, the Financing Company Act and other existing laws. Pursuant thereto the Commission shall have, among others, the following powers and functions:

Have jurisdiction and supervision over all corporations, partnership or associations who are the grantees of primary franchises and/or a license or a permit issued by the Government;

Formulate policies and recommendations on issues concerning the securities market, advise Congress and other government agencies on all aspect of the securities market and propose legislation and amendments thereto;

Approve, reject, suspend, revoke or require amendments to registration statements, and registration and licensing applications;

Regulate, investigate or supervise the activities of persons to ensure compliance;

Supervise, monitor, suspend or take over the activities of exchanges, clearing agencies and other SROs;

Impose sanctions for the violation of laws and rules, regulations and orders, and issued pursuant thereto;

Prepare, approve, amend or repeal rules, regulations and orders, and issue opinions and provide guidance on and supervise compliance with such rules, regulation and orders;

Enlist the aid and support of and/or deputized any and all enforcement agencies of the Government, civil or military as well as any private institution, corporation, firm, association or person in the implementation of its powers and function under its Code;

Issue cease and desist orders to prevent fraud or injury to the investing public;

Punish for the contempt of the Commission, both direct and indirect, in accordance with the pertinent provisions of and penalties prescribed by the Rules of Court;

Compel the officers of any registered corporation or association to call meetings of stockholders or members thereof under its supervision;

Issue subpoena duces tecum and summon witnesses to appear in any proceedings of the Commission and in appropriate cases, order the examination, search and seizure of all documents, papers, files and records, tax returns and books of accounts of any entity or person under investigation as may be necessary for the proper disposition of the cases before it, subject to the provisions of existing laws;

Suspend, or revoke, after proper notice and hearing the franchise or certificate of registration of corporations, partnership or associations, upon any of the grounds provided by law; and

Exercise such other powers as may be provided by law as well as those which may be implied from, or which are necessary or incidental to the carrying out of, the express powers granted the Commission to achieve the objectives and purposes of these laws.

The Commissions jurisdiction over all cases enumerated under section 5 of Presidential Decree No. 902-A is hereby transferred to the Courts of general jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme Court in the exercise of its authority may designate the Regional Trial Court branches that shall exercise jurisdiction over the cases.

The Commission shall retain jurisdiction over pending cases involving intra-corporate disputes submitted for final resolution which should be resolved within one (1) year from the enactment of this Code. The Commission shall retain jurisdiction over pending suspension of payment/rehabilitation cases filed as of June 30, 2000 until finally disposed.

D. Who are affected by the Law?

The following are the affected persons and parties as defined above. These are issuer, broker, dealer, associated person of a broker or dealer, clearing agency, exchange, insider, promoter, salesman, and underwriter.

The following respective chapters covered or governed the following specific persons:

a. Chapter VII - Prohibitions and Fraud, Manipulation and Insider Trading governs the insiders.

b. Chapter VIII - Regulation of Securities Market Professionals governs the brokers, dealers, associated person of a broker or dealer, promoter, salesman and underwriter.

c. Chapter IX - Exchanges and Other Securities Trading Markets governs the clearing agency and exchanges.

E. Registration/Reportorial Requirements

1. Registration Requirements

a. What needs to be registered, and its Exempt Securities and Transactions.

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.

The requirement of registration as stated above shall not as a general rule apply to any of the following classes of securities:

a. Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any person controlled or supervised by, and acting as an instrumentality of said Government.

b. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, That the Commission may require compliance with the form and content for disclosures the Commission may prescribe.

c. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body.

d. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue.

e. Any security issued by a bank except its own shares of stock.

The Commission may, by rule or regulation after public hearing, add to the foregoing any class of securities if it finds that the enforcement of this Code with respect to such securities is not necessary in the public interest and for the protection of investors.

Also, the requirement of registration under the first paragraph shall not apply to the sale of any security in any of the following transactions:

a. At any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy.

b. By or for the account of a pledge holder, or mortgagee or any of a pledge lien holder selling of offering for sale or delivery in the ordinary course of business and not for the purpose of avoiding the provision of this Code, to liquidate abonafidedebt, a security pledged in good faith as security for such debt.

c. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner therefore, or by his representative for the owners account, such sale or offer for sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transaction of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security.

d. The distribution by a corporation actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus.

e. The sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.

f. The issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, when the entire mortgage together with all the bonds or notes secured thereby are sold to a single purchaser at a single sale.

g. The issue and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion entitling the holder of the security surrendered in exchange to make such conversion: Provided, That the security so surrendered has been registered under this Code or was, when sold, exempt from the provision of this Code, and that the security issued and delivered in exchange, if sold at the conversion price, would at the time of such conversion fall within the class of securities entitled to registration under this Code. Upon such conversion the par value of the security surrendered in such exchange shall be deemed the price at which the securities issued and delivered in such exchange are sold.

h. Brokers transaction, executed upon customers orders, on any registered Exchange or other trading market.

i. Subscriptions for shares of the capitals stocks of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stocks under the Corporation Code, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized, capital increase.

j. The exchange of securities by the issuer with the existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.

k. The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period.

l. The sale of securities to any number of the following qualified buyers:

i. Bank;

ii. Registered investment house;

iii. Insurance company;

iv. Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in trust functions;

v. Investment company or;

vi. Such other person as the Commission may rule by determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management.

The Commission may exempt other transactions, if it finds that the requirements of registration under this Code is not necessary in the public interest or for the protection of the investors such as by the reason of the small amount involved or the limited character of the public offering.

Any person applying for an exemption under this Section, shall file with the Commission a notice identifying the exemption relied upon on such form and at such time as the Commission by the rule may prescribe and with such notice shall pay to the Commission fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum value aggregate price or issued value of the securities.

No person shall offer, sell or enter into commodity futures contracts except in accordance with the rules, regulations and orders the Commission may prescribe in the public interest. The Commission shall promulgate rules and regulations involving commodity futures contracts to protect investors to ensure the development of a fair and transparent commodities market.

b. Registration Process

All securities required to be registered shall be registered through the filing by the issuer in the main office of the Commission, of a sworn registration statement with the respect to such securities, in such form and containing such information and document as the Commission prescribe. The registration statement shall include any prospectus required or permitted to be delivered under Subsections 8.2, 8.3, and 8.4 of the SRC.

In promulgating rules governing the content of any registration statement (including any prospectus made a part thereof or annex thereto), the Commission may require the registration statement to contain such information or documents as it may, by rule, prescribe. It may dispense with any such requirements, or may require additional information or documents, including written information from an expert, depending on the necessity thereof or their applicability to the class of securities sought to be registered.

The information required for the registration of any kind, and all securities, shall include, among others, the effect of the securities issue on ownership, on the mix of ownership, especially foreign and local ownership.

The registration statement shall be signed by the issuers executive officer, its principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its corporate secretary, or persons performing similar functions accompanied by a duly verified resolution of the board of directors of the issuer corporation. The written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed. Where the registration statement shares to be sold by selling shareholders, a written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed to by such selling shareholders shall be filed.

Upon filing of the registration statement, the issuer shall pay to the Commission a fee of not more than one-tenth (1/10) of oneper centum(1%) of the maximum aggregate price at which such securities are proposed to be offered. The Commission shall prescribe by the rule diminishing fees in inverse proportion the value of the aggregate price of the offering.

Notice of the filing of the registration statement shall be immediately published by the issuer, at its own expense, in two (2) newspapers of general circulation in the Philippines, once a week for two (2) consecutive weeks, or in such other manner as the Commission by the rule shall prescribe, reciting that a registration statement for the sale of such securities has been filed, and that aforesaid registration statement, as well as the papers attached thereto are open to inspection at the Commission during business hours, and copies thereof, photostatic or otherwise, shall be furnished to interested parties at such reasonable charge as the Commission may prescribe.

Within forty-five (45) days after the date of filing of the registration statement, or by such later date to which the issuer has consented, the Commission shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement as provided in Section 14 hereof. The Commission shall enter an order declaring the registration statement to be effective if it finds that the registration statement together with all the other papers and documents attached thereto, is on its face complete and that the requirements have been complied with. The Commission may impose such terms and conditions as may be necessary or appropriate for the protection of the investors.

Upon affectivity of the registration statement, the issuer shall state under oath in every prospectus that all registration requirements have been met and that all information are true and correct as represented by the issuer or the one making the statement. Any untrue statement of fact or omission to state a material fact required to be stated herein or necessary to make the statement therein not misleading shall constitute fraud.

c. Rejection, Revocation, Amendment and Suspension of Registration of Securities

1. Rejection and Revocation of Registration of Securities

The Commission may reject a registration statement and refuse registration of the security there-under, or revoke the affectivity of a registration statement and the registration of the security there-under after the due notice and hearing by issuing an order to such effect, setting forth its finding in respect thereto, if it finds that:

(a) The issuer:

(i) Has been judicially declared insolvent;

(ii) Has violated any of the provision of this Code, the rules promulgate 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 requirements 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 statements of a material fact required to be stated therein or necessary to make the statement therein not misleading; or

(c) The issuer, any officer, director or controlling person performing similar functions, or any under writer 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 or administrative body for violations of securities, commodities, and other related laws.

For the purposes of this subsection, the term "competent judicial or administrative body" shall include a foreign court of competent jurisdiction as provided for under Rules of Court.

The Commission may compel the production of all the books and papers of such issuer, and may administer oaths to, and examine the officers of such the issuer or any other person connected therewith as to its business and affairs.

If any issuer shall refuse to permit an examination to be made by the Commission, its refusal shall be ground for the refusal or revocation of the registration of its securities.

If the Commission deems its necessary, it may issue an order suspending the offer and sale of the securities pending any investigation. The order shall state the grounds for taking such action, but such order of suspension although binding upon the persons notified thereof, shall be deemed confidential, and shall not be published. Upon the issuance of the suspension order, no further offer or sale of such security shall be made until the same is lifted or set aside by the Commission. Otherwise, such sale shall be void.

Notice of issuance of such order shall be given to the issuer and every dealer and broker who shall have notified the Commission of an intention to sell such security.

A registration statement may be withdrawn by the issuer only with the consent of the Commission.

2. Amendment of Registration of Securities

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.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.

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

If, at any time, the Commission finds that the 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 affectivity registration statement. If the statement is duly amended, the suspension order may be lifted.

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.

c. Suspension of Registration of Securities

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 judgement 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 the 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.

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 broken know 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.

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 is 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 there of, 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.

2. Reportorial Requirements

Every issuer satisfying the requirements in Subsection 17.2 hereof shall file with the Commission:

a. Within one hundred thirty-five (135) days, after the end of the issuers fiscal year, or such other time as the Commission may prescribe, an annual report which shall include, among others, a balance sheet, profit and loss statement and statement of cash flows, for such last fiscal year, certified public accountant, an a management discussion and analysis of results of operation; and

b. Such other periodical reports for interim fiscal periods and current reports on significant developments of the issuer as the Commission may prescribe as necessary to keep current information on the operation of the business and financial condition of the issuer.

The reportorial requirements of above paragraph shall apply to the following:

a. An issuer which has sold a class of its securities pursuant to a registration under section 12 hereof: Provided however,That the obligation of such issuer to file reports shall be suspended for any fiscal year after the year such registration became effective if such issuer, as of the first day of any such fiscal year, has less than one hundred (100) holder of such class securities or such other number as the Commission shall prescribe and it notifies the Commission of such;

b. An issuer with a class of securities listed for trading on an Exchange; and

c. An issuer with assets of at least Fifty million pesos (50,000,000.00) or such other amount as the Commission shall prescribe, and having two hundred (200) or more holder each holding at least one hundred (100) share of a class of its equity securities:Provided, however, That the obligation of such issuer to file report shall be terminate ninety (90) days after notification to the Commission by the issuer that the number of its holders holding at least one hundred (100) share reduced to less than one hundred (100).

Every issuer of a security listed for trading on an Exchange a copy of any report filed with the Commission under first paragraph, hereof.

All reports (including financial statements) required to be filed with the Commission pursuant to first paragraph hereof shall be in such form, contain such information and be filed at such times as the Commission shall prescribe, and shall be in lieu of any periodical or current reports or financial statements otherwise required to be filed under the Commission shall prescribe.

Every issuer which has a class of equity securities satisfying any of the requirements in Subsection 17.2 shall furnish to each holder of such equity security an annual report in such form and containing such information as the Commission shall prescribe.

Within such period as the Commission may prescribe preceding the annual meeting of the holders of any equity security of a class entitled to vote at such meeting , the issuer shall transmit to such holders an annual report in conformity with subsection 17.5.

b. Reports by five per centum (5%) Holders of Equity Securities

In every case in which an issuer satisfies the requirements of Subsection 17.2 hereof any person who acquires directly or indirectly the beneficial ownership of more than five of per centum (5%) of such class or in excess of such lesser per centum as the Commission by rule may prescribe, shall, within ten (10) days after such acquisition or such reasonable time as fixed by the Commission, submit to the issuer of the securities, to the Exchange where the security is traded, and to the Commission a sworn statement containing the following information and such order information as the Commission may require in the public interest or for the protection of investors.

a. The personal background, identity, residence, and citizenship of, and the nature of such beneficial ownership by, such person and all other person by whom or on whose behalf the purchases are effected; in the event the beneficial owner is a juridical person, the of business of the beneficial owner shall also be reported;

b. If the purpose of the purchases or prospective purchases is to acquire control of the business of the issuer of the securities, any plans or proposals which such persons may have that will effect a major change in its business or corporate structure;

c. The number of shares of such security which are beneficially owned, and the number of shares concerning which there is a right to acquire, directly or indirectly, by; (i) such person, and (ii) each associate of such person, giving the background, identity, residence, and citizenship of each such associate; and

d. Information as to any contracts, arrangements, or understanding with any person with respect to any securities of the issuer including but not limited to transfer, joint ventures, loan or option arrangements, puts or call guarantees or division of losses or profits, or proxies naming the persons with whom such contracts, arrangements, or understanding have been entered into, and giving the details thereof.

If any change occurs in the facts set forth in the statements, an amendment shall be transmitted to the issuer, the Exchange and the Commission.

The Commission, may permit any person to file in lieu of the statement required by subsection 17.1 hereof, a notice stating the name of such person, the shares of any equity securities subject to Subsection 17.1 which are owned by him, the date of their acquisition and such other information as the commission may specify, if it appears to the commission that such securities were acquired by such person in the ordinary course of his business and were not acquired for the purpose of and do not have the effect of changing or influencing the control of the issuer nor in connection with any transaction having such purpose or effect.

III. APPLICABLE CASE LAWS AND JURISPRUDENCE

A. Philippine Courts Decision

SEC v. Prosperity.com, Inc.

G.R No. 164197

January 25, 2012

Facts:Prosperity.Com, Inc. (PCI) is a corporation engaged in selling computer software and hosted websites without providing internet service.To make a profit, PCI devised a scheme in which, for the price of US$234.00, a buyer could acquire from it an internet website of a 15-Mega Byte (MB) capacity.At the same time, by referring to PCI his own down-line buyers, a first-time buyer could earn commissions, interest in real estate in the Philippines and in the United States, and insurance coverage worthP50,000.00.

In 2001, disgruntled elements of Golconda Ventures, Inc. filed a complaint with the SEC against PCI, alleging that the latter had taken over GVIs operations.After hearing,the SEC, through its Compliance and Enforcement unit, issued a Cease and Desist Order against PCI.The SEC ruled that PCIs scheme constitutes an Investment contract and, following the Securities Regulations Code,it should have first registered such contract or securities with the SEC.

Instead of asking the SEC to lift its Cease and Desist Order (CDO) in accordance with Section 64.3 of Republic Act (R.A.) 8799, PCI filed with the Court of Appeals (CA) a petition forcertiorari against the SEC with an application for a temporary restraining order (TRO) and preliminary injunction.Because the CA did not act promptly on this application for TRO, on January 31, 2001 PCI returned to the SEC and filed with it before the lapse of the five-day period a request to lift the CDO.On the following day, February 1, 2001, PCI moved to withdraw its petition before the CA to avoid possible forum shopping violation.

The CA ruled that, following theHoweytest, PCIs scheme did not constitute an investment contract that needs registration pursuant to R.A. 8799.

Hence, this petition.Issue: Whether or not PCIs scheme constitutes an investment contract that requires registration under R.A. 8799.

Held:

No.The Securities Regulation Code treats investment contracts as securities that have to be registered with the SEC before they can be distributed and sold.An investment contract is a contract, transaction, or scheme where a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others.The United States Supreme Court held inSecurities and Exchange Commission v. W.J. Howey Co. that, for an investment contract to exist, the following elements, referred to as theHoweytest must concur: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others.

Here, PCIs clients do not make such investments.They buy a product of some value to them: an Internet website of a 15-MB capacity.The client can use this website to enable people to have internet access to what he has to offer to them.The buyers of the website do not invest money in PCI that it could use for running some business that would generate profits for the investors.The price of US$234.00 is what the buyer pays for the use of the website, a tangible asset that PCI creates, using its computer facilities and technical skills.

PCI appears to be engaged in network marketing, a scheme adopted by companies for getting people to buy their products outside the usual retail system where products are bought from the stores shelf.Under this scheme, adopted by most health product distributors, the buyer can become a down-line seller.The latter earns commissions from purchases made by new buyers whom he refers to the person who sold the product to him.The network goes down the line where the orders to buy come.

The commissions, interest in real estate and insurance coverage worthP50,000.00, are mere incentives to down-line sellers to bring in other customers.These can hardly be regarded as profits from investment of money under theHoweytest.

SEC v. Oudin Santos

GR No. 195542

March 19, 2014

FACTS:

The SEC, through its Compliance and Endorsement Division, filed a complaint for violation of Sections 8,26and 28of the Securities Regulation Code against the principal officers of Philippine International Plannning Center (PIPC): Liew, Chairman and President; Cristina GonzalezTuason, Director and General Manager; Ma. Cristina BautistaJurado, Director; and herein respondent Santos.

On its complaint-affidavit the SEC alleged that due to the inducements and solicitations of the PIPC corporations directors, officers and employees/agents/brokers, private complainants Lorenzo and Sy were enticed to invest their hardearned money, the minimum amount of which must be US$40,000.00, with PIPCBVI, with a promise of higher income potential of an interest of 12% to 18% per annum at relatively lowrisk investment program. Also, private complainants claimed that they were made to believe that PIPC Corporation refers to Performance Investment Product Corporation, the Philippine office or branch of PIPCBVI, which is an entity engaged in foreign currency trading, and not Philippine International Planning Center Corporation. On the whole, Lorenzo and Sy charge Santos in her capacity as investment consultant of PIPC Corporation who actively engaged in the solicitation and recruitment of investors.

On her part, Santos defense consist of the following: (1) denial on the participation in conspiracy and fraud perpetrated against the investorcomplainants of PIPC Corporation, specifically Sy and Lorenzo; (2) she claimed that she was initially and merely an employee of, and subsequently an independent information provider for, PIPC Corporation; (3) PIPC Corporation being a separate entity from PIPCBVI of which Santos has never been a part of in any capacity; (4) her not having received any money from Sy and Lorenzo, the two having, in actuality, directly invested their money in PIPCBVI; (5) Santos having dealt only with Sy and the latter, in fact, deposited money directly into PIPCBVIs account; and (6) on the whole, PIPCBVI as the other party in the investment contracts signed by Sy and Lorenzo, thus the only corporation liable to Sy and Lorenzo and the other complainants.

In the 18 April 2008 Resolution, the DOJ discussed at length the liability of PIPC Corporation and its officers, employees, agents and all those acting on PIPC Corporations behalf, to wit:

Sec. 8.Requirement of Registration of Securities. 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.

The abovequoted provision is loud and clear and needs no further interpretation. It is thefirmthrough its authorized officers that is required to register its securities with the SEC and not the individual persons allegedly selling and/or offering for sale said unregistered securities..

The abovenamed respondents, aside from being officers, employees or investors, clearly acted as agents of PIPC Corp. who made representations regarding PIPC Corp. and PIPCBVI investment products. They assured their clients that investing with PIPCBVI will be 100% guaranteed. In addition, they also facilitated their clients investments with PIPCBVI and some, if not all, even received money investor