5.4 Exempt Securities and Exempt Transactions
Key Takeaways
Section 9 of the SRC exempts classes of securities and Section 10 exempts transactions; under SRC Rule 10.1, a person claiming a Section 10 exemption must prove it if challenged.
Section 9.1(e) exempts securities issued by a bank except the bank's own shares of stock, which must be registered before a public offering unless another exemption applies.
A Section 10.1(k) private placement covers sales by an issuer to fewer than twenty persons in the Philippines within twelve months, without general solicitation or advertising.
SEC MC No. 11, Series of 2025 removed the notice and fee for Section 10.1 transactions; an issuer may still request optional confirmation on Form 10.1.
SEC MC No. 15, Series of 2026 requires a qualified individual buyer to meet one financial test, such as ₱10 million annual gross income for two years or ₱30 million net worth, plus one experience test.
5.4 Exempt Securities and Exempt Transactions
While Section 8.1 of Republic Act No. 8799 (The Securities Regulation Code) establishes the general mandate that all securities offered or sold in the Philippines must be registered, the law recognizes that registration is costly and unnecessary in specific contexts. To facilitate capital formation without compromising market integrity, the SRC establishes two distinct categories of exemptions:
- Exempt Securities (Section 9): The exemption attaches to the instrument itself. The security is permanently exempt from registration across all subsequent transfers and secondary trading due to the inherent creditworthiness, sovereign status, or specialized regulatory oversight of the issuer.
- Exempt Transactions (Section 10): The exemption attaches strictly to the transaction or method of distribution. The underlying security is not inherently exempt; if a purchaser seeks to re-offer or distribute the securities to the general public later, registration is triggered unless another statutory exemption applies.
Section 9: Exempt Securities
Under Section 9.1 of the SRC, the requirement of registration does not apply to the following classes of securities:
Section 9 Exempt Securities Catalog
├── 9.1(a) Philippine Government Securities: Treasury bills, bonds, sovereign debt issued by BTr
├── 9.1(b) Foreign Sovereign Debt: Issued by countries with diplomatic relations, on reciprocal basis
├── 9.1(c) Court-Appointed Receivers / Trustees: Certificates in bankruptcy or insolvency
├── 9.1(d) Sector-Regulated: sale or transfer supervised by IC, HLURB (now DHSUD), or BIR
└── 9.1(e) Bank Securities (EXCEPT Own Shares): NCDs, LTNCDs, debentures issued by commercial banks
1. Government and Sovereign Debt (Section 9.1(a) & (b))
- Domestic Sovereign Debt (9.1(a)): Any security issued or guaranteed by the Government of the Philippines, or by any political subdivision or agency thereof, or by any entity controlled, supervised, and acting as an instrumentality of the National Government. This includes Treasury Bills (T-Bills) and Retail Treasury Bonds (RTBs) auctioned by the Bureau of the Treasury (BTr), as well as Bangko Sentral ng Pilipinas (BSP) bills.
- Foreign Sovereign Debt (9.1(b)): Any security issued or guaranteed by the government of any foreign country with which the Philippines maintains diplomatic relations, or state/provincial subdivisions, on the basis of reciprocity.
2. Receiver and Insolvency Certificates (Section 9.1(c))
- Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body. That adjudicatory oversight substitutes for SEC registration.
3. Securities Regulated by Other Specialized Agencies (Section 9.1(d))
- Any security or its derivatives whose sale or transfer is, by law, under the supervision and regulation of:
- The Insurance Commission (IC): for example, life insurance policies, variable life contracts, and annuity contracts.
- The Housing and Land Use Regulatory Board (HLURB), whose regulatory functions now rest with the Department of Human Settlements and Urban Development (DHSUD): for example, contracts to buy subdivision lots or condominium units.
- The Bureau of Internal Revenue (BIR): instruments whose sale or transfer the law places under BIR supervision.
4. Bank Securities and the Critical Equity Carve-Out (Section 9.1(e))
Under Section 9.1(e), any security issued by a bank is exempt from SEC registration, EXCEPT ITS OWN SHARES OF STOCK.
Important
The Section 9.1(e) Bank Shares Exam Trap:
- Bank debt instruments, such as Negotiable Certificates of Deposit (NCDs), Long-Term Negotiable Certificates of Deposit (LTNCDs), and bank promissory notes regulated by the Bangko Sentral ng Pilipinas, are exempt securities.
- SRC Rule 9.2 confirms the exemption for evidence of indebtedness issued by a BSP-licensed bank or quasi-bank, while keeping the anti-fraud and civil-liability provisions of the SRC applicable.
- However, common shares and preferred shares of stock issued by commercial banks are STRICTLY NOT EXEMPT. When a commercial bank (e.g., BDO, BPI, Metrobank) conducts an Initial Public Offering or rights offering of its common stock, it must register those equity shares with the SEC under Section 8.1.
Section 10: Exempt Transactions
Under Section 10.1 of the SRC, securities registration is not required when securities are distributed through specific commercial transactions:
| Statutory Subsection | Exempt Transaction Description | Practical Commercial Application |
|---|---|---|
| Section 10.1(a) | Judicial and Insolvency Sales | Execution sales by sheriffs, court executors, guardians, or bankruptcy trustees |
| Section 10.1(b) | Pledgee / Mortgagee Liquidation | Sales by a bank or creditor liquidating pledged collateral upon borrower default |
| Section 10.1(c) | Isolated Non-Issuer Transactions | One-off private sales by an individual shareholder for their own account |
| Section 10.1(d) | Stock Dividends | Distribution by an operating corporation to its security holders as a stock dividend or other distribution out of surplus |
| Section 10.1(e) | Sale to Existing Stockholders | Preemptive rights offerings exclusively to existing shareholders without sales commissions |
| Section 10.1(f) | Single Mortgage Sale | Real estate notes or mortgage bonds sold in their entirety to a single purchaser at a single sale |
| Section 10.1(g) | Conversion Privilege | Shares issued upon conversion of convertible preferred stock or convertible bonds |
| Section 10.1(h) | Brokers' Transactions | Broker transactions executed upon customers' orders on a registered exchange or other trading market |
| Section 10.1(i) | Pre-Incorporation Subscriptions | Capital stock subscriptions prior to incorporation or capital stock increases under RCCP |
| Section 10.1(j) | Exclusive Security Holder Exchange | Exchange of securities with existing security holders exclusively without commission |
| Section 10.1(k) | Private Placement (< 20 Persons) | Sales by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period; the IRR counts non-qualified buyers |
| Section 10.1(l) | Sales to Qualified Buyers (QBs) | Sales to any number of qualified buyers: banks, registered investment houses, insurers, qualifying pension or retirement funds, investment companies, and other persons the SEC determines |
Private Placements and Qualified-Buyer Offerings
Two commercially important Section 10.1 exemptions are the limited private placement and the sale to qualified buyers.
| Feature | Section 10.1(k) private placement | Section 10.1(l) qualified buyers |
|---|---|---|
| Purchaser limit | No more than 19 non-qualified investors within a 12-month period | No numerical limit imposed by this exemption if every purchaser qualifies |
| Solicitation | No general solicitation or advertising | Distribution remains limited to qualified buyers and must not be used as a device to evade registration |
| Investor disclosure | Written disclosure identifies the relied-upon exemption and states that the securities are unregistered | The same core written disclosure obligation applies |
| SEC confirmation | Optional Form 10.1 confirmation under SEC MC No. 11, Series of 2025 | Optional Form 10.1 confirmation under SEC MC No. 11, Series of 2025 |
For a Section 10.1(k) placement, exceeding nineteen non-qualified holders within the relevant twelve-month period creates a registration problem, and a resale that expands the holder base can also defeat the intended limitation unless the resale independently qualifies for an exemption. The issuer must count beneficial owners separately when an entity was formed specifically to acquire the offered securities and is not itself a qualified buyer.
Qualified-Buyer Categories and Current Financial Tests
The statutory categories include banks, registered investment houses, insurance companies, qualifying government or bank-managed pension and retirement funds, registered investment companies, and other persons meeting the SEC's financial-capacity and sophistication rules.
Under SEC Memorandum Circular No. 15, Series of 2026, a natural person registering as a qualified individual buyer must satisfy one financial limb and one experience limb:
- Financial capacity: annual gross income of at least ₱10 million for each of the two years before registration, or a portfolio of at least ₱10 million in SEC-registered securities or securities exempt from SRC registration, or personal net worth of at least ₱30 million; and
- Experience: at least one year of personal or professionally managed securities trading, or at least two years in a responsible professional position requiring securities knowledge or expertise.
A juridical person must have gross assets of at least ₱100 million, or a portfolio of at least ₱60 million in SEC-registered securities, securities exempt from registration, or government financial instruments. Financial size alone does not turn an unregistered person into a qualified buyer; the applicable registrar process and continuing qualifications matter.
Confirmation and Burden of Proof
SEC Memorandum Circular No. 11, Series of 2025 states that a transaction already enumerated in Section 10.1 does not require a notice or fee merely to obtain the statutory exemption. An issuer may nevertheless apply for an optional confirmation using Form 10.1 and supply the prescribed disclosures and supporting documents. This is different from an application under Section 10.2 for discretionary exemptive relief, for which an application and fee apply.
Whether or not optional confirmation is sought, anti-fraud and civil-liability rules, written investor disclosures, and resale limitations remain. SRC Rule 10.1 of the 2015 Implementing Rules and Regulations places on any person claiming a Section 10 exemption the burden, if challenged, of establishing that the exemption is available, and the Commission may challenge the exemption at any time. Section 10.3 of the Code is the separate notice-and-fee provision; under MC No. 11, its fee of one-tenth of one percent now applies to Section 10.2 applications.
Secondary Resale Restrictions on Exempt Securities
When an investor purchases securities in an exempt transaction (e.g., under private placement 10.1(k)), those securities are classified as restricted securities.
- The purchaser cannot freely redistribute or re-offer the securities to the general retail public.
- Any subsequent public distribution by the holder triggers the registration mandate of Section 8.1 unless the secondary resale itself qualifies as an isolated transaction under Section 10.1(c) or is made to Qualified Buyers under Section 10.1(l).
Comparative Matrix: Exempt Securities vs. Exempt Transactions
| Legal Feature | Exempt Securities (Section 9) | Exempt Transactions (Section 10) |
|---|---|---|
| Scope of Exemption | Attaches to the security itself | Attaches strictly to the transaction method |
| Secondary Market Trading | Remains exempt in all future resales | Secondary resales may trigger registration |
| Government Debt (T-Bills, RTBs) | Fully exempt under 9.1(a) | N/A (Security is already exempt) |
| Bank Equity Shares | NOT EXEMPT (Carved out in 9.1(e)) | May be sold under 10.1(k) or 10.1(l) |
| Investor Ceiling | Unlimited public distribution | Capped at 19 for 10.1(k); unlimited for QBs |
| Anti-Fraud Coverage | Still applies; the exemption is only from Section 8 registration | Still applies (SRC Rule 10.1) |
| Burden of Proof | The relying party must show the security falls within a listed class | On the claimant, if challenged (SRC Rule 10.1) |
Practical Exam Traps and Regulatory Pitfalls
- Trap 1: The Bank Stock Trap. If an exam question asks: "Which of the following is an exempt security under Section 9 of the SRC?" and lists "Common shares issued by a commercial bank," this is incorrect. Bank debt is exempt, but bank shares of capital stock must be registered.
- Trap 2: The "Twenty Investors" Private Placement Trap. Remember that Section 10.1(k) requires fewer than 20 persons. If an issuer sells shares to exactly 20 retail investors, the exemption is lost.
- Trap 3: Stock Dividends as Public Offerings. Distributing stock dividends out of unrestricted retained earnings does not require registration because it is an exempt transaction under Section 10.1(d).
- Trap 4: Who Bears the Burden of Proof? If the SEC charges a company with selling unregistered investment contracts, the company bears the burden of proving that its sale qualified as an exempt transaction. The rule comes from SRC Rule 10.1 of the 2015 Implementing Rules; Section 10.3 of the Code concerns notice and fees.
Under Section 9.1(e) of Republic Act No. 8799 (The Securities Regulation Code), which of the following instruments issued by a licensed commercial bank is strictly EXCLUDED from the category of exempt securities and must be registered with the SEC prior to public offering?
Long-Term Negotiable Certificates of Deposit (LTNCDs) regulated by the Bangko Sentral ng Pilipinas.
The common and preferred shares of stock representing the bank's own capital stock.
Short-term interbank promissory notes issued to another universal bank.
Negotiable foreign exchange certificates of deposit.
A real estate corporation in Makati raises expansion capital by selling convertible corporate bonds directly to eighteen (18) wealthy individual investors during a ten-month period without filing a registration statement. Under Section 10.1(k) of the SRC, how is this offering treated?
It is a fraudulent transaction because all corporate bond sales require prior presidential clearance.
It is an illegal public offering because all debt issuances exceeding ₱1,000,000 must register with the SEC.
It is a valid exempt transaction as a private placement because the securities were sold to fewer than twenty persons within a twelve-month period.
It is classified as an exempt security under Section 9 because corporate bonds are secured by real estate.
Under SRC Rule 10.1 of the 2015 Implementing Rules and Regulations of the Securities Regulation Code, when the SEC challenges an issuer's claim that its sale of unregistered securities was an exempt transaction under Section 10, who bears the burden of proving the exemption?
The Securities and Exchange Commission must prove beyond reasonable doubt that no exemption applies.
The Philippine Stock Exchange must submit a certified market surveillance report.
The individual investors must prove that the issuer promised guaranteed returns.
The issuer or other person claiming the exemption bears the burden of establishing that it is available.
Sections you finish are checked off in the contents.