SRC BarQs Flashcards
X Corporation is engaged in a scheme whereby an investor is
required to become a Business Center Owner (BCO) who must
fill-up and sign its application form. The Terms and Conditions
printed at the back of the application form indicate that the
BCO shall mean an independent representative of Power
Homes, who is enrolled in the company’s referral program and
who will ultimately purchase real property from any accredited
real estate developers and as such he is entitled to a referral
bonus/commission. Paragraph 5 of the same indicates that there
exists no employer/employee relationship between the BCO
and the Power Homes Unlimited, Corp. The BCO is required
to pay US$234 as his enrollment fee. His enrollment entitles
him to recruit two investors who should pay US$234 each and
out of which amount he shall receive US$92. In case the two
referrals/enrollees would recruit a minimum of four (4) persons,
each recruiting two (2) persons who become his/her own down
lines, the BCO will receive a total amount of US$147.20 after
deducting the amount of US$36.80 as property fund from the
gross amount ofUS$184. After recruiting 128 persons in a period
of eight (8) months for each Left and Right business groups or
a total of 256 enrollees whether directly referred by the BCO or
through his down lines, the BCO who receives a total amount
of US$11,412.80 after deducting the amount of US$363.20 · as
property fund from the gross amount of US$11, 776, has now an
accumulated amount of US$2, 700 constituting as his Property
Fund placed in a Property Fund account with the Chinabank.
This accumulated amount of US$2, 700 is used as partial/full
down payment for the real property chosen by the BCO from
any of (petitioner’s] accredited real estate developers. Is X
Corporation involved in the distribution of securities?
Yes, X Corporation is engaged in the business of distributing
securities in the form of investment contract. To be a security
subject to regulation by the SEC, an investment contract must
be proved to be: (1) an investment of money, (2) in a common
enterprise, (3) with expectation of profits, and ( 4) primarily
from efforts of others. In this case, what BCO is really acquiring
is the possibility of deriving money from the sale of the plans.
Once an individual has purchased a Plan, he turns his efforts
toward bringing others into the organization, for which he will
receive a part of what they pay. His task is to bring prospective
purchasers to “Adventure Meetings.” (Power Homes Unlimited
Corporation u. Securities and Exchange Commission, C.R. No.
164182, February 26, 2008; See also 2010 Bar)
W.J. Howey Company and Howey-in-the-Hills Service, Inc. are
corporations under direct common control and management.
The Howey Company owns large tracts of citrus lands. Half of
the land was cultivated through Howey-in-Hills Service, Inc.
The other half is being offered to the public “to help finance
additional developments.” Each prospective customer is
offered both a land sales contract and a service contract. While
the purchaser is free to engage the services of other service
companies, the purchaser is informed that it is not feasible to
invest in a grove unless service arrangements are made and the
superiority of Howey-in-Hills Service, Inc. is stressed. Around
85% of the groves that were sold are covered by contracts with
Howey-in-Hills Service, Inc. The land sales contracts provide
for uniform price per fraction thereof varying in amount only
in accordance with the number of years a particular plot has
been planted citrus. The land is conveyed upon full payment
through a deed. The tracts are not separately fenced and the sole
indication of several ownership is found in small land marks.
On the other hand, service contracts are generally for ten (10)
years without the right to cancel. The leasehold right and full
control and possession are given to Howey-in-Hills Service, Inc.
The landowner has no right to over the fruit; he has no right
to market the fruits. The service contractor is accountable only
for an allocation of the net profits based upon a check made at
the time of the picking. All produce is pooled by the companies
which do business under their own names. Are the contracts
being offered by the two companies in the nature of investment
contracts that are considered securities under the law?
Yes, the contracts are investment contracts that are securities
under the law. The companies are offering more than fee
simple interests in land, something different from a farm or
orchard coupled with management services. They are offering
an opportunity to contribute money and to share in the profits
of a large citrus fruit enterprise managed and owned by the
companies. They are offering this opportunity to persons who
reside in different localities and who lack the equipment and
experience requisite to cultivation, harvesting and marketing
of citrus products. The respective shares of the purchasers
are evidenced by contracts that are convenient instruments of
determining the shares in the profits. The resulting transfer
of rights in the land is merely incidental. Consequently, all
the elements of a profit-seeking business venture are present.
The investor provides the capital and share in the earnings
and profits; the promoter manages, controls, and operates the
enterprise. Thus, investment contracts are involved regardless
of the legal terminology in which such contracts are clothed.
(SEC u. W.J. Howey Co., 328 U.S. 293 [19461)
T Corporation has a business plan under which it will assign
leasehold rights over the lots and condotel units for a valuable
consideration and the assignees will enroll said units under
a management contract with T Corporation or its authorized
condotel operator to undertake the leasing of the same wherein
profits will be realized and remitted to the assignee on top of the
guaranteed aggregate 30-day use per year of the condotel unit.
Does the scheme involve investment contracts?
Yes, the transactions are investment contracts that are securities
under the SRC. What is involved is a scheme whereby a person
invests his money in the common enterprise and is led to expect
profits primarily through the efforts of others. T Corporation is
offering more than leasehold rights but also the opportunity to
contribute money and to share in the profits of leasing condotel
units managed and currently owned by T Corporation. (SEC-
OGC Opinion No. 11-49 dated December 21, 2011)
ETS sold payphones to the public via independent distributors.
The payphones were offered packaged with a site lease, a
5-year leaseback and management agreement and a buyback
agreement. All but a tiny fraction of purchasers chose this
package although other management options were offered.
The purchase price per package was US$7,000.00. Under the
leaseback and management agreement, purchasers received $82
per month, a 14% annual return. Purchasers were not involved
in the day-to-day operation of the payphones that they owned.
ETS selected the site for the phone, installed the equipment,
arranged for connection and long-distance service, collected coin
revenues, and maintained and repaired the phones. Under the
buyback agreement, ETS promised to refund the full purchase
price of the package at the end of the lease or within 180 days of
a purchaser’s request. The payphones did not generate enough
revenues for ETS to make payments required for the leaseback
agreement so the company depended on funds from new
investors to meet its obligations. Are the packages securities?
Yes, the packages that were sold are securities. What is involved
is a scheme whereby a· person invests his money in the common
enterprise and is led to expect profits primarily through the
efforts of others. In this easer, the investments were made on
the promise of monthly income on the leaseback agreement. The
fact that the rate of the income is fixed is of no moment. There
is no distinction between fixed and variable returns. Otherwise,
unscrupulous marketers of investments could evade securities
laws by simply picking a fixed rate of return. (Securities and
Exchange Commission v. Edwards, No. 02-1196, January 13,
2004, 540 U.S. 1)
CJH Development Corporation (CJHDC) is a duly organized
domestic corporation which is engaged in the acquisition,
development, sale, lease and management of real estate and any
improvements thereon or any interest and right therein. CJH
Suites Corporation (CJHSC), on the other hand, is a wholly-
owned subsidiary of CJHDC which was formed primarily
for the purpose of acquiring, maintaining, operating and
managing hotels, inns, lodging houses, restaurants and other
allied businesses. On October 19, 1996, CJHDC entered into
a Lease Agreement (Agreement) with the Bases Conversion
and Development Authority (BCDA) for the development into
a public tourism complex, multiple-use forest watershed and
human resource development center, of a 247-hectare property
within the John Hay Special Economic Zone in Baguio City.
The fixed annual rental for the property for the first five
years was pegged at P425,001,378.00 or five percent of Gross
Revenues, whichever is higher. Thereafter, for the duration of
the lease period, the fixed annual rental shall not be more than
P150,000,000.00 or five percent of Gross Revenues, whichever
is higher. Among other provisions, the Agreement authorized
CJHDC to sub-lease, develop and manage the abovementioned
property for a period of fifty (50) years, or until 2046. It was
also provided that, upon expiration of the Agreement, the leased
property shall revert back to the BCDA and all the improvements
thereon shall become its property.
Subsequently, CJHDC came up with a development plan
and put it into effect. Part of such development plan was the
construction of two (2) condominium-hotels (condotels) which it
named as “The Manor” and “The Suites”. Subject to CJHDC’s
leasehold rights under the Agreement, the residential units in
these condotels were then offered for sale to the general public
by means of two schemes. The first is a straight purchase and
sale contract where the buyer pays the purchase price for the
unit bought, either in lump sum or on installment basis and,
thereafter, enjoys the benefits of full ownership, subject to
payment of maintenance dues and utility fees. The second
scheme involved the sale of the unit with an added option to
avail of a “leaseback” or a “money-back” arrangement. Under
this added option, the buyer pays for the unit bought and,
subsequently, surrenders its possession to the management of
CJHDC or CJHSC. These corporations would then create a pool
of these units and, in tum, will offer them for billeting under
the management of the hotel operated by the Camp John Hay
Leisure, Inc. (CJHLI). This arrangement lasts for a period of
fifteen (15) years with a renewal option for the same period until
2046. The buyers who opt for the “leaseback” arrangement will
receive either a proportionate share in seventy percent (70%) of the annual income derived from the hotel operation of the
pooled rooms or a guaranteed eight percent (8%) return on their
investment. On the other hand, those who choose to avail of
the “money-back” arrangement are entitled to a return of the
purchase price they paid for the units by expiration of the Lease
Agreement in 2046. The buyers are given the right to use their
units for thirty (30) days within a year and they are exempted
from paying the monthly dues and utility fees.
Sometime in May 2010, the BCDA and the CJHDC entered
into an agreement for the restructuring of the latter’s rental
payments and other financial obligations to the former. Thus,
pursuant· to this agreement, CJHDC transferred ownership
of, among others, sixteen (16) units from “The Manor” and ten
(10) units from “The Suites” to the BCDA via dacion en pago.
These units were covered by Limited Warranty Deeds and were
subject to a “leaseback” arrangement. Subsequently, the BCDA
acquired information regarding CJHDC and CJHSC’s scheme of
selling “The Manor” and “The Suites” units through “leaseback”
or “money-back” terms. Hence, in a letter dated November 18,
2011, the BCDA requested the SEC to conduct an investigation
into the operations of CJHDC and CJHSC on the belief that
the “leaseback” or “money-back” arrangements they are offering
to the public is, in essence, investment contracts which are
considered as securities under Republic Act No. 8799, otherwise
known as the Securities Regulation Code (SRC).
Acting on such a request, the Enforcement and Prosecution
Department (EPD) of the SEC conducted its own investigation
of the operations of CJHDC and CJHSC with respect to the
sale of the subject condotel units and, thereafter, submitted
a Field Investigation Report,5 dated February 1, 2012, to the
Chairperson of the SEC, providing details of their findings
during such investigation. The EPD was also able to confer
with several buyers of the condotel units who gave information
with respect to the terms of the contracts they entered into with
respondents.
Subsequently, on April 23, 2012, the SEC’s Corporation
Finance Department (CFD) issued a Memorandum6 indicating
its opinion that the «leaseback» arrangements offered by
respondents to the public are investment contracts. On May 16,
2012, the EPD filed a Motion for Issuance of Cease and Desist
Order7 with the SEC En Banc praying that CJHDC and CJHSC,
their respective officers, directors, representatives, salesmen,
agents, and any and all persons claiming and acting for and
in their behalf be directed to immediately cease and desist
“from further engaging in activities of selling and/or offering for sale investment contracts covering the condotel units on
“leaseback” and/or “money-back” arrangements until the
requisite registration statement is duly filed with and approved
by the Commission and the corresponding permit to offer/sell
securities is issued.”8 The case was docketed as SEC-CDO Case
No. 05-12-006.
On June 7, 2012, the SEC En Banc issued an Order finding
prima facie evidence that respondents CJH DEVELOPMENT
CORPORATION and its wholly-owned subsidiary CJH
SUITES CORPORATION, “are engaged in the business of
selling securities without the proper registration issued by
this Commission in violation [of] Section 8 of the SRC, the
respondents, their respective officers, directors, representatives,
salesmen, agents and any and all persons claiming and acting for
and in their behalf, are hereby ordered to immediately CEASE
and DESIST from further engaging in the business of selling
securities until they have complied with the requirements
of law and its implementing rules and regulations.” Was the
Cease and Desist Order (CDO) validly issued even without prior
hearing? Was there violation of the right of the respondents to
due process?
Yes the CDO was validly issued. There was no violation of the
right of the respondents to due process. Sections 64.1 of the SRC
provides that the SEC “after proper investigation or verification,
motu proprio, or upon verified complaint by any aggrieved
party, may issue a cease and desist order without the necessity
of a prior hearing if in its judgment the act or practice, unless
restrained, will operate as a fraud on investors or is otherwise
likely to cause grave or irreparable injury or prejudice to the
investing public. Under Section 64.3 of the SRC, the remedy of
the party against whom the CDO was issued is to file a formal
request for lifting thereof. The law is clear on the point that a
cease and desist order may be issued by the SEC motu proprio,
it being unnecessary that it results from a verified complaint
from an aggrieved party. A prior hearing is also not required
whenever the Commission finds it appropriate to issue a cease
and desist order that aims to curtail fraud or grave or irreparable
injury to investors. There is good reason for this provision, as
any delay in the restraint of acts that yield such results can only
generate further injury to the public that the SEC is obliged to
protect.
To equally protect individuals and corporations from
baseless and improvident issuances, the authority of the SEC
under this rule is nonetheless with defined limits. A cease and
desist order may only be issued by the Commission after proper investigation or verification, and upon showing that the acts
sought to be restrained could result in injury or fraud to the
investing public. Without doubt, these requisites were duly
satisfied by the SEC prior to its issuance of the subject cease
and desist order.
In the present case, the SEC through its EPD, conducted
an investigation upon request of the BCDA. The EPD dispatched
a team of SEC employees, who posed as representatives of
interested buyers, to the John Hay Special Economic Zone in
Baguio City. There, the te!lm mem,bers were able to talk to
CJHDC’s Director of Sales, who, not only explained to them the
straight and leaseback agreements, but also gave the team copies
of marketing material, as well as sample contracts, indicating
that respondents are indeed selling the subject units either on
a straight purchase or leaseback agreement. Subsequently, on
three different occasions, the EPD invited several buyers of the
subject condotels and met with them in separate conferences
wherein these buyers shed light on the transactions they
entered into with respondents and informed the EPD that
they bought condotel units on a leaseback arrangement. These
buyers provided the EPD copies of document relating to their
purchase of condotel units on such terms. Upon issuance of
the CDO, nothing prevented respondents from filing a motion
to lift the said Order wherein they could have amply explained
their position. However, they chose not to avail of this remedy
and, instead, went directly, albeit erroneously, to the CA via a
petition for review.
Lastly, the Court neither agrees with the ruling of the
CA that there is nothing in the assailed CDO which shows
that the acts sought to be restrained therein operate as a fraud
on investors. The SEC arrived at a preliminary finding that
respondents are engaged in the business of selling securities
without the proper registration issued by the Commission.
Based on this initial finding, respondents’ act of selling
unregistered securities would necessarily operate as a fraud on
investors as it deceives the investing public by making it appear
that respondents have authority to deal on such securities. As
correctly cited by the SEC, Section 8.1 of the SRC clearly states
that 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 SEC and that prior to such
sale, information on the securities, in such form and with such
substance as the SEC may prescribe, shall be made available to
each prospective buyer. The Court agrees with the SEC that the purp s of this provision is to afford the public protection from
investing in worthless securities. (The Securities and Exchange
Commission (SEC) Chairperson Teresita J. Herbosa, et. al. v.
CJH Development Corporation, C.R. No. 210316, November 28,
2016)
Grand Gas Corporation, a publicly listed company, discovered after
extensive drilling a rich deposit of natural gas along t�e coast of
Ant
.
ique. For five months the company did not disclose the discovery so ‘
that it could quietly and cheaply acquire neig · hb ormg · 1 d d a� a secure 1:
A:
mmmg · · · rig ht s to the land Between the discovery and its disclosure ·
of the information to the Securities and Exchange Commis· · si 11 �
n, a
the directors and key officers of the company bought sha�es m the
company at very low prices. After the disclosure,
.
the price of the
shares went up. The directors and officers sold their shares at huge
profits.
