37.1 Securities Regulation, Corporate Governance, and SRC Rule 68
Key Takeaways
Securities cannot be sold in the Philippines without an SEC-approved registration statement unless the security or the transaction is exempt, and exemptions do not remove anti-fraud liability.
An investment contract is an investment of money in a common enterprise with an expectation of profits from the efforts of others.
Insiders and tippees may not trade on material nonpublic information, and directors, officers, and 10% owners must disgorge short-swing profits made within six months.
Acquiring 35% or more of a public company's equity within 12 months, or crossing 50%, requires a tender offer to all holders of the class.
Listed companies follow the 2016 Code of Corporate Governance and public companies the 2019 Code, both on a comply-or-explain basis.
Securities Regulation, Corporate Governance, and SRC Rule 68
The Securities Regulation Code (SRC, RA 8799) protects investors by requiring full disclosure, registration of securities, and fair trading. This section covers the kinds of securities, registration and exemptions, reporting by issuers and public companies, prohibited fraud, manipulation, and insider trading, tender offers and other shareholder protections, the corporate governance codes, SRC Rule 68 financial reporting, and SEC issuances.
1. What Is a Security?
Under Section 3 of the SRC, securities are shares, participation, or interests in a corporation, commercial enterprise, or profit-making venture evidenced by a certificate, contract, or instrument (written or electronic). They include shares of stock, bonds, debentures, notes, asset-backed securities, investment contracts, certificates of participation in profit-sharing agreements, fractional interests in oil, gas, or mineral rights, derivatives such as options and warrants, and proprietary or non-proprietary membership certificates.
An investment contract exists when there is (1) an investment of money, (2) in a common enterprise, (3) with an expectation of profits, (4) arising primarily from the efforts of others (the Howey test, adopted in SEC v. Prosperity.com, 2012). Many investment scams are unregistered investment contracts.
2. Registration of Securities
Rule (Section 8): securities may not be sold or offered for sale or distribution in the Philippines unless a registration statement has been filed with and approved by the SEC. The statement includes a prospectus that must be made available to investors. The SEC reviews the filing, may require amendments, and may reject or suspend a registration statement that is misleading or incomplete.
| Exempt securities (Section 9) | Exempt transactions (Section 10) |
|---|---|
| Securities issued or guaranteed by the Government, its subdivisions, and instrumentalities | Judicial sales and sales by executors, administrators, receivers, or trustees in insolvency |
| Securities issued by the BSP | Isolated transactions by the owner (not the issuer) |
| Securities of foreign governments with which the Philippines maintains diplomatic relations | Distribution of stock dividends to existing shareholders without commission |
| Certain securities issued by banks (other than their own shares) | Sales of capital stock to existing shareholders where no commission is paid |
| Other securities the SEC exempts | Private placements: sales to not more than 19 persons in the Philippines during any 12-month period, and sales to qualified buyers |
Exempt securities and transactions are free from registration but not from the SRC's anti-fraud provisions.
3. Reporting and Disclosure
- Section 17 reporting companies (issuers of registered securities, listed companies, and public companies with assets of at least PHP 50 million and at least 200 holders each holding at least 100 shares of a class of equity) file an annual report (SEC Form 17-A), quarterly reports (17-Q), and current reports on material events (17-C).
- Beneficial ownership (Section 18): a person who acquires 5% or more of a class of equity securities of a reporting company must report it to the issuer, the exchange, and the SEC.
- Short-swing profits (Section 23): directors, officers, and 10% beneficial owners must report their holdings, and any profit from a purchase and sale (or sale and purchase) within six months is recoverable by the issuer.
4. Fraud, Manipulation, and Insider Trading
- Manipulation of prices (Section 24): prohibited acts include wash sales and matched orders that create a false appearance of active trading, spreading false information to move prices, and pegging or fixing prices except as allowed for stabilization.
- Fraudulent transactions (Section 26): employing any scheme to defraud, or making untrue statements or omissions of material fact, in connection with the purchase or sale of securities.
- Insider trading (Section 27): an insider may not buy or sell a security of the issuer while in possession of material nonpublic information, unless the insider proves the information was not gained from the relationship or the other party knew it. Insiders include the issuer, its directors, officers, and controlling persons, persons whose relationship gives them access to the information, and tippees who receive it from them. Communicating such information to others who are likely to trade is also prohibited.
5. Protection of Shareholder Interests
- Mandatory tender offer (Section 19 and its rules): a person who intends to acquire 35% or more of the equity shares of a public company within 12 months, or whose acquisition would give them more than 50%, must make a tender offer to all holders of the same class on the same terms.
- Proxy and information statements (Section 20): solicitation of proxies from security holders of reporting companies must follow SEC rules on disclosure.
- Civil liability (Sections 56 to 63): persons responsible for false registration statements or prospectuses, manipulation, or insider trading are liable to injured investors.
6. Corporate Governance Codes
| Covered companies | Code | Approach |
|---|---|---|
| Publicly listed companies | Code of Corporate Governance for PLCs (SEC MC No. 19, s. 2016) | Comply or explain; companies disclose their practices in the Integrated Annual Corporate Governance Report |
| Public companies and registered issuers | Code of Corporate Governance for Public Companies and Registered Issuers (SEC MC No. 24, s. 2019) | Comply or explain |
Key recommendations include a competent and independent board with at least three independent directors (or one-third of the board, whichever is higher) for PLCs, a nine-year cumulative term limit for independent directors, board committees (audit, corporate governance, board risk oversight, and related party transactions), and policies on related party transactions and whistleblowing.
7. SRC Rule 68 and SEC Issuances
Revised SRC Rule 68 sets the general financial reporting requirements for corporations: it defines the covered entities, prescribes the financial reporting framework by size (full PFRS, PFRS for SMEs, PFRS for Small Entities, or the income tax basis for micro entities), requires a Statement of Management's Responsibility signed by the chairman, chief executive officer, and chief financial officer, sets the audit threshold (total assets or liabilities above PHP 3 million from fiscal years ending on or after December 31, 2025, under SEC MC No. 4, s. 2026, subject to exceptions), and prescribes the qualifications, accreditation, and rotation of independent auditors of covered entities.
SEC issuances: memorandum circulars are rules with the force of law when issued within the SEC's authority and published, while SEC opinions interpret the law on specific queries; they bind the SEC but not the courts.
A startup offers its unregistered shares to 15 investors in the Philippines during a 12-month period, none of whom is a qualified buyer, and pays no commission. Under the SRC, which statement is correct?
The offer violates Section 8 because every sale of securities must be registered
The sale is an exempt transaction as a private placement to not more than 19 persons within 12 months, but the anti-fraud rules still apply
The shares become exempt securities
The sale is exempt only if the SEC approves it in advance
A director learns that his company will announce a major loss next week and sells his shares before the announcement. Which SRC provision is most directly violated?
Section 18 on beneficial ownership reporting
Section 27 on insider trading
Section 19 on tender offers
Section 9 on exempt securities
An investor intends to acquire 40% of the outstanding equity shares of a public company through several purchases within 12 months. What must the investor do under the SRC's tender offer rules?
Nothing, because only acquisitions above 50% are covered
Make a tender offer to all holders of the same class on the same terms
Obtain approval from the PCC
Register the shares with the SEC
Sections you finish are checked off in the contents.