Securities Regulation Code

Question 1

The main feature of a security is that a person purchases or acquires the same in the expectation of obtaining _____________ or _____________.

Answer 1

Passive income or asset appreciation

Question 2

Securities include (7):

Answer 2

1. Shares of stock, bonds, debentures. notes, evidences of indebtedness, asset-backed securities
2. Investment contracts, certificate of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription
3. Fractional undivided interests in oil, gas, or other mineral rights
4. Derivatives (options & warrants)
5. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates, or similar instruments
6. Proprietary or nonproprietary membership certificates in corporations
7. Other instruments

Question 3

What are the requisites of an investment contract?

Answer 3

1. Investment of money
2. In a common enterprise
3. With expectations of profits
4. Primarily from the efforts of others

Question 4

SEC Powers

Answer 4

• approves registration statement for securities
• may audit the financial statements, assets, and other information of firm applying for registration of securities, whenever it deems necessary to ensure full disclosure or protect the interest of investors and the public
• may exempt other transactions
• may prescribe issuer reportorial requirements threshold
• should receive notif from issuer that holders shares are reduced

Question 5

Procedure for registration

Answer 5

1. Filing a SWORN REGISTRATION STATEMENT
   (signatories to registration, written consent of expert, written certification)
2. PAYMENT of filing fees (1/10 of 1% of the aggregate price)
3. PUBLICATION of notice (two newspapers of gen. circ. once for 2 consecutive weeks
4. Within 45 days after date of filing, SEC gives ORDER
5. PROSPECTUS under oath

Question 6

Securities EXEMPT from registration

Answer 6

1. issued or guaranteed by the Gov’t of the Philippines
2. issued or guaranteed by the government of any country (basis of reciprocity)
3. certificates issued by a receiver or trustee in a bankruptcy
4. securities under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board or the BIR
5. issued by bank (except its own shares of stock)

Question 7

Transactions EXEMPT from registration

Answer 7

1. BROKER’S transaction
2. ISOLATED transaction
3. STOCK dividend or other distribution our of surplus
4. Right of CONVERSION
5. EXCLUSIVE sale (to its own stockholders)
6. PRIVATE PLACEMENT (fewer than 20 persons in 12 months)
7. SUBSCRIPTIONS
8. SOPHISTICATED (Qualified Buyers): Banks, Registered investment house, Insurance company, Pension fund/retirement plan, Investment company
9. MORTGAGE-BACKED securities
10. At sale in INSOLVENCY or bankruptcy
11. To LIQUIDATE a bonafide debt (security pledge in good faith as security for such debt)
12. EXCHANGE of securities with existing security holders exclusively

Question 8

Reportorial requirements (Securities Regulation Code)

Answer 8

1. Annual report (balance sheet, profit or loss statement, and statement of cash flows)
2. Other periodic reports for interim fiscal periods and current reports

Question 9

These reportorial requirements shall apply to an issuer:

Answer 9

1. Which has sold a class of its securities pursuant to a registration
2. Class of securities listed for trading in an exchange
3. Assets of 50M with 200 or more holders each holding at least 100 shares

If shares held are reduced to less than 100, obligation will be terminated 90 days after notification to SEC

Question 10

Who are insiders?

Answer 10

1. Issuer
2. Director/officer of issuer or a person controlling issuer
3. Person whose relationship/former relationship to issuer gave him access
4. Government employers or director/officer of an exchange, clearing agency, and/or self-regulatory organization
5. person who learns such information by a communication from persons 1-4

Question 11

Presumption: Purchase or sale of a security of the issuer made by an insider, insider’s spouse/relatives by affinity or consanguinity within the 2nd degree shall be presumed to have been effected while in possession of material non-public information, if transacted:

Answer 11

1. After such information came into existence
2. Prior to dissemination of info to the public and after a lapse of a reasonable time for the market to absorb such information

Question 12

(T/F) It is unlawful for any person other than the tender offeror who is in possession of material nonpublic information relating to a tender offer to buy or sell securities of the issuer that are sought or to be sought by such tender offer.

Answer 12

TRUE

Question 13

Any transaction in a security which involves no change in beneficial ownership. A series of buy and sell transactions placed by one and the same beneficial owner

Answer 13

Wash sale

Question 14

Order or orders for a purchase or sale of security with the knowledge that a simultaneous order/orders of substantially the same size, time, and price for the sale or purchase of such security has, or will be entered by or for the same or different parties

Answer 14

Matched order

Question 15

(T/F) Wash sale and matched order are illegal no matter what

Answer 15

FALSE.

Wash sale and Matched Orders are not in themselves illegal but they are considered fraudulent whenever they are resorted to to create a false/misleading appearance of active trading

Question 16

Placing of purchase or sales order at or near the close of the trading period to affect the closing price, likewise affecting the opening price the following day

Answer 16

Marking the close

Question 17

Made during normal trading hours which involves buying activity among nominee accounts at increasingly higher/lower prices or causing fictitious reports to appear on the ticker tape

Answer 17

Painting the tape

Question 18

Part or portion of the issuer/security which is outstanding but intentionally held by dealers or other person with a view of reselling them later for profit. Affects supply while demand stays the same, driving prices up

Answer 18

Squeezing the float

Question 19

Purchase of stock of dormant shell company for a nominal amount and marketing and “hyping” the virtues of the stock. Once stock reaches high price, shareholdings are “dumped” and they bail out

Answer 19

Hype and Dump

Question 20

Involves an intensive selling campaign through numerous salesman by telephone or through direct mail offerings. Induces investors through hard-sell techniques based on unfounded predictions and misleading market letters

Answer 20

Boiler room operations

Question 21

When do Marking the Close, Painting the Tape, Squeezing the Float, Hype and Dump, and Boiler Room Operations become illegal or unlawful?

Answer 21

1. Raises the price or induces the purchase
2. Depresses the price or induces the sale
3. Creates active trading to induce purchase or sale

Question 22

Involves people providing information that the price of any security listed in the exchange will or is likely to rise or fall because of manipulative market operations

Answer 22

Circulating or Disseminating Information on Share Price Movement

Question 23

Making statements with respect to any material fact which he knew or had some reasonable grounds to believe was false or misleading

Answer 23

Making false or misleading statements

Question 24

Selling the security which the vendor does not own and borrowed only from another. Not illegal per se but regulated

Answer 24

Short sale

Question 25

Applies to any person who intends to acquire at least 35% in 12 months of any class of securities of: 1. Listed corporations, or 2. Corporations with a. Assets of at least 50M b. At least 200 shareholders who each have at least 100 shares Still applies even if acquisition is less than 35% but will result in ownership of over 50% of total outstanding equity shares.

Answer 25

Mandatory tender offer

Question 26

Transactions EXEMPT from mandatory tender offer requirement

Answer 26

1. Purchase of shares from unissued capital stock (will not result in 50% or more ownership) 2. Purchase from increase in authorized capital stock 3. Foreclosure proceedings 4. Privatization by government 5. Corporate rehabilitation 6. Purchases through an open market at a prevailing market price 7. Merger or consolidation