a. Exempt Securities and Exempt Transactions

EXEMPT SECURITIES

Exempt securities are those to which the requirement of registration under Subsection 8.1 of the SRC¹ generally does not apply. The following are exempt securities:

• 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. Such securities are generally exempt from registration under Sec. 9.1(a) of the SRC.²

• 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.
• Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body.
• 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.
• Any security issued by a bank except its own shares of stock. (SRC, 9)³

REMEMBER THIS: When a bank issues securities other than its own shares of stock, common or preferred, it does not need to register the said securities with the SEC as long as the BSP consents thereto. If, however, the security to be issued by a bank is a share of stock, then those shares need to be registered with the SEC prior to any public offering.

EXEMPT TRANSACTIONS

The enumeration of transactions under Sec. 10⁴ that can qualify as exempt transactions are exclusive and specific. Hence, the exemption is transaction-specific, unlike the exempt securities under Sec. 9⁵ which will always be exempt from registration regardless of the underlying transaction or offering. For the upcoming bar exam, be familiar with the transactions exempted by Sec. 10 from the registration requirement under Sec. 8.1, including qualifying subscriptions pursuant to an increase in authorized capital stock and securities sold at a judicial sale. Neither exemption depends on approval of the securities issuance by the SEC or a court. Other specified transactions include an exchange pursuant to a right of conversion, a private placement (less than 20 buyers) and a QIB offering (qualified institutional buyers are those with sophistication, experience and knowledge sufficient to form judgment on whether to invest or not in a securities offering).

• Judicial sale of securities: Any judicial sale, or sale by an executor, administrator, guardian or receiver or trustee in insolvency or bankruptcy

NOTE: As distinguished from exempt securities specially issued by the receiver or trustee in a bankruptcy proceeding mentioned above, the shares covered under exempt transactions are ordinary shares sold at a judicial sale or by an executor, administrator, guardian, receiver or trustee in insolvency or bankruptcy; bankruptcy of the owner is not required.

• Sale of foreclosed securities: By or on account of a pledge holder or mortgagee or any other similar lien holder, selling or offering for sale or delivery in the ordinary course of business, not for the purpose of avoiding the provisions of SRC, to liquidate a bona fide debt, a security pledged in good faith as security for such debt;
• Isolated transaction: An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or for his account, not being made in the course of repeated and successive transactions of a like character, and such owner or representative not being the underwriter of such security;
• Stock dividends: Distribution by a corporation of securities to its stockholders or other security holders as stock dividend or other distribution out of surplus;
• Sale of shares to stockholders not underwritten: Sale of capital stock of a corporation to its own stockholders exclusively – whether previously issued or unissued, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale;
• Issuance of bonds to a single purchaser: Issuance of bonds or notes secured by mortgage upon real estate or tangible personal property, where the entire mortgage, together with all the bonds or notes it secures, is sold to a single purchaser at a single sale;
• Transaction pursuant to the right of conversion: Issuance and delivery of any security in exchange for any other security of the same issuer pursuant to a right of conversion, provided that the:
• Surrendered has been registered under the SRC or was, exempt, when sold
• Security issued and delivered in exchange would, at the time of conversion, fall into the class entitled to registration;
• Broker’s transactions: Broker’s transactions, executed upon customer’s orders, on any registered Exchange or trading market;
• Pre-incorporation subscription or subscription to a capital increase: Subscriptions to shares of capital stock (1) prior to incorporation or (2) pursuant to an increase in authorized capital stock – both to comply with the requirements of the law for minimum subscription;
• Exchange of securities with existing security holders: Exchange of securities by the issuer exclusively with its existing security holders exclusively, where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange
• The difference between (h) and (j) is that (h) covers an exchange pursuant to a right of conversion, subject to its statutory conditions, while (j) covers an issuer’s exchange of securities exclusively with its existing security holders, subject to the statutory restriction on remuneration for soliciting the exchange;
• Private placements: Sale of securities by an issuer to fewer than 20 persons during any twelve-month period; and

REMEMBER THIS: This exempt transaction which requires as a precondition the offering to fewer than 20 persons over a 12-month period is the very essence of what constitutes an offering that is not public. If, however, the offering is made to qualified institutional buyers or qualified individual buyers, the number of persons becomes irrelevant as you can see in the subsequent exemption for qualified buyers.

• Sale to qualified buyers: Sale of securities to any of the following qualified buyers:
• Bank
• Registered investment house
• Insurance company
• Pension fund or retirement plan maintained by the government or managed by a bank or other persons authorized by the BSP to engage in trust functions
• Investment company
• Such other person at the Commission may determine as qualified.

REMEMBER THIS: The parties to the offering may seek a confirmation of exempt transaction status from the SEC, but this step is optional. Note that the burden of proving entitlement to an exemption rests with the claimant. Notice and fee requirements, if any, depend on the particular Sec. 10 exemption and its implementing rule under the 2015 IRR of the SRC⁶.

Notes:

The SEC may exempt other transactions, if it finds that the requirements of registration under the SRC 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. (SRC, Sec. 10.2)⁷An example of this provision is a stock option plan or an employee stock purchase plan which is commonly offered by publicly-listed companies to their executives and employees.

Issuance from authorized but previously unissued capital stock may be granted exemption (Nestle Philippines, Inc. v. COURT OF APPEALS and SECURITIES AND EXCHANGE COMMISSION, G.R. No. 86738, 13 November 1991)⁸