a. Definition; Howey Test

B. Concept of Securities; Howey Test – R.A. No. 8799, Section 3

SEC. 3. Definition of Terms. — 3.1. "Securities" are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character. It includes:

• Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;
• Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates 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.

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

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

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

3.5 "Associated person of a broker or dealer" is an employee thereof who, 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.

3.6 "Clearing agency" is any person who acts as intermediary in making deliveries upon payment to effect settlement in securities transactions.

3.7 "Exchange" is an organized marketplace or facility that brings together buyers and sellers and executes trades of securities and/or commodities.

3.8 "Insider" means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to 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, or 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 of the foregoing insiders.

3.9 "Pre-need plans" are contracts which provide for the performance of future services or the payment of future monetary considerations at the time of 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.

3.10 "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.

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

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

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

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

3.15  "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.

Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture evidenced by a certificate, contract, instrument, whether written or electronic in character. The definition includes investment contracts. (SRC, Sec. 3.1)¹

KINDS OF SECURITIES

• “Per Se” Securities: those enumerated specifically under Sec. 3 of the SRC² to fall within the definition of “securities”. Examples of those named as securities are shares of stock, bonds, fractional undivided interests in oil/gas/other mineral rights, derivatives like options and warrants, proprietary or non- proprietary membership certificates in corporations, etc.
• “Investment Contracts: as defined under the 2015 IRR of the SRC³, An investment contract means a contract, transaction or scheme (collectively "contract") whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits.
• Catch-all – Other instruments as SEC may determine in the future.

A sale of securities to fewer than twenty (20) persons in the Philippines during any twelve-month period is an exempt transaction. (SRC, Sec. 10.1(k))

Howey Test

The Howey Test is used to determine whether a contract is an investment contract within the definition of securities.

• Under this test, an investment contract may be a transaction, contract, or scheme whereby a person:
• Makes an investment of money,
• In a common enterprise,
• With the expectation of profits,
• To be derived primarily from the efforts of others
• The Howey Test was applied in the Philippines, specifically in the case of Power Homes wherein it was determined that transactions under a pyramiding scheme partakes the nature of investment contracts and thus falls under the definition of "securities" under the SRC (Power Homes Unlimited Corporation v. Securities and Exchange Commission and Noel Manero, G.R. No. 164182, 26 February 2008)⁴.

Securities Market Participants

• Issuer is an originator, maker, obligor, or creator of the security. (SRC, Sec. 3.2)⁵
• Broker is a person engaged in the business of buying and selling securities for the account of others. (SRC, Sec. 3.3)⁶ The client of the broker is a third party.
• Dealer is a person, who buys and sells securities for his own account in the ordinary course of business. (SRC. Sec. 3.4)⁷ A dealer transacts using the dealer’s own resources and not for third parties, unlike a broker.
• Prospectus is the document, made by or on behalf of an issuer, underwriter or dealer, to sell or offer securities for sale to the public through a registration statement filed with the SEC. (SRC. Sec. 3.11)⁸ This is the offering circular containing all material information about the issuer and the securities sought to be offered to the public.

Registration

General rule: Securities are prohibited to be sold or offered for sale or distribution within the Philippines (SRC. Sec. 8.1)⁹:

• Without registration statement duly filed with and approved by SEC; and
• Prior to such sale, information on the securities, in such form and with such substance as SEC may prescribe, must be made available to each prospective purchaser.

Exception: The following may be sold without need of registration:

• Exempt securities (SRC, Sec. 9)
• Exempt transactions (SRC, Sec. 10)

NOTE:

• Unless an exemption applies, securities may not be sold or offered for sale or distribution within the Philippines without a registration statement duly filed with and approved by the SEC. (SRC, Secs. 8.1, 9 and 10) At the end of the registration process, the registration statement will be rendered effective by the SEC and a permit to sell will be issued. Registration allows the SEC to ensure that there is full and fair disclosure of all material information in connection with the public offering.
• In approving the registration of the securities, the SEC is not only concerned with the requirement that full disclosure of information is given to the public but the SEC is also concerned with the merit of the securities themselves and the issuer (PSE v. Court of Appeals, G.R. No. 125469, 1997).

HOWEY TEST

For an investment contract to exist, the following elements must concur:

• A contract, transaction or scheme;
• An investment of money;
• Investment is made in a common enterprise;
• Expectation of profits; and
• Profits arising primarily from the effort of others.

Network marketing - In Prosperity.com, the particular network-marketing arrangement was not an investment contract because the commissions at issue were not profits derived primarily from others’ efforts. Other schemes must be assessed under the Howey Test. (SEC v. Prosperity.com, Inc., G.R. No. 164197, January 25, 2012)

Turner Test

Howey Test

The Howey Test is used to determine whether a contract is an investment contract within the definition of securities.

• Under this test, an investment contract may be a transaction, contract, or scheme whereby a person:
• Makes an investment of money,
• In a common enterprise,
• With the expectation of profits,
• To be derived primarily from the efforts of others
• The Howey Test was applied in the Philippines, specifically in the case of Power Homes Unlimited Corp. v. SEC¹¹ wherein it was determined that transactions under a pyramiding scheme partakes the nature of investment contracts and thus falls under the definition of "securities" under the SRC (Power Homes Unlimited Corp. v. SEC).