11/23/17

Securities
Securities Regulation Code Securities are
▪ shares,
in a
▪ corporation or
and IRR Rule 68 ▪ participation or ▪ in a commercial enterprise or
▪ interests ▪ profit-making venture
ATTY. RAEGAN L. CAPUNO, CPA
• Tax Lawyer, Siguion Reyna, Montecillo & Ongsiako Law Offices
• Top 12 in the Philippine Bar Examination 2015 and evidenced by a
• Taxation Law Professor in San Sebastian College-Recoletos College of Law
• CPA Reviewer and Lecturer in Management Advisory Services, Taxation and Regulatory
▪ certificate
Framework for Business Transactions
▪ contract
• Lecturer in Criminal Procedure for Criminologist Licensure Examination
• Subject Matter Expert in Forensic Accounting and Business Security Management ▪ instruments
• Professor of Accountancy
• Registrar and former Chair of BS Accountancy, First Asia Institute of Technology and whether written or electronic in character.
Humanities (FAITH)
• Former auditor at Isla Lipana & Co., a member firm of PricewaterhouseCoopers

Securities Issuer, Broker, Dealer and Associated Person

Securities include of a Broker or Dealer
1. Shares of stocks, bonds, debentures, notes evidences of
ISSUER the originator, maker, obligor, or creator of the security.
indebtedness, asset-backed securities;
2. Investment contracts, certificates of interest or participation in a
profit sharing agreement, certifies of deposit for a future BROKER a person engaged in the business of buying and selling securities for
subscription; the account of others.

3. Fractional undivided interests in oil, gas or other mineral rights;

DEALER means many persons who buys sells securities for his/her own
4. Derivatives like option and warrants;
account in the ordinary course of business.
5. Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments
ASSOCIATED PERSON OF A BROKER OR DEALER
6. Proprietary or nonproprietary membership certificates in
an employee therefor whom, directly exercises control of
corporations; and
supervisory authority, but does not include a salesman, or an agent
7. Other instruments as may in the future be determined by the or a person whose functions are solely clerical or ministerial.
Securities and Exchange Commission (SEC).

Clearing Agency and Exchange Registration Statement and Prospectus

CLEARING AGENCY REGISTRATION STATEMENT
Any person who acts as intermediary in making Application for the registration of securities
deliveries upon payment effect settlement in required to be filed with the SEC.
securities transactions

PROSPECTUS
EXCHANGE
Document made by or on behalf of an
An organized market place or facility that brings issuer, underwriter or dealer to sell or offer
together buyers and sellers and executes trade of securities for sale to the public through
securities and/or commodities. registration statement filed with the SEC.

In the Philippines, the Philippine Stock Exchange is

good example of a market place for buyers and
sellers of securities. Hence, an exchange.

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Investment Contracts
REGISTRATION OF SECURITIES
An investment contract means a
contract, transaction or scheme
whereby a person invests his money
in a common enterprise and is led to
expect profits primarily from the
efforts of another.

The concept of investment contract

modifies the Howey Test which
requires the profit to be derived
solely from the efforts of others.

Requirement of Registration of Securities Exempt Securities

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 Securities and Exchange
Commission.
There are securities that can be sold or offered for sale or
distribution within the Philippines even without complying
with the registration requirement of the SEC.
They are called as exempt securities.

Prior to such sale, information on the securities, in such form

and with such substance as the Commission may prescribe,
shall be made available to each prospective purchaser.

Exempt Securities Exempt Securities

1. Any security issued or guaranteed: 3. Certificates issued:

 by the Government of the Philippines,  by a receiver or

 or by any political subdivision or agency thereof,  by a trustee

in bankruptcy duly approved by the proper adjudicatory body.
 or by any person controlled or supervised by, and acting as
an instrumentality of said Government.
4. Any security or its derivatives the sale or transfer is under the supervision
and regulation of the
2. Any security issued or guaranteed:  Office of the Insurance Commission
 by the government of any country with which the  Housing and Land Use Rule Regulatory Board, or
Philippines maintains diplomatic relations, or
 the Bureau of Internal Revenue.
 by any state, province or political subdivision thereof on
the basis of reciprocity
5. Any security issued by a bank except its own shares of stock.

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Exempt Transactions Exempt Transactions

There are also transactions on securities that do not require registration with
the SEC. These transactions are as follows:
1. At any judicial sale, or sale by an executor, administrator, guardian or
receiver or trustee in insolvency or bankruptcy.
2. By or for the account of a pledge holder, or mortgagee or any of a pledge
lien holder selling of offering for sale or delivery in the ordinary course of
business and not for the purpose of avoiding the provision of this Code
3. An isolated transaction.
4. The distribution by a corporation actively engaged in the business
authorized by its articles of incorporation, of securities to its stockholders
or other security holders as a stock dividend or other distribution out of
surplus.
5. The sale of capital stock of a corporation to its own stockholders
exclusively, where no commission or other remuneration is paid or given
directly or indirectly in connection with the sale of such capital stock.
6. The issuance of bonds or notes secured by mortgage upon real estate or
tangible personal property, when the entire mortgage together with all the
bonds or notes secured thereby are sold to a single purchaser at a single
sale.
7. The issue and delivery of any security in exchange for any other security of
the same issuer pursuant to a right of conversion entitling the holder of
the security surrendered in exchange to make such conversion
8. Broker’s transaction, executed upon customer’s orders, on any registered
Exchange or other trading market.
9. Subscriptions for shares of the capitals stocks of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized
capital stocks under the Corporation Code
10. The exchange of securities by the issuer with the existing security holders
exclusively, where no commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange.

Exempt Transactions Rejection and Revocation of Registration of

11. The sale of securities by an issuer to fewer than twenty (20) persons in the Securities
Philippines during any twelve-month period.
12. The sale of securities to any number of the following qualified buyers: The SEC may
i. Bank; ➢ reject a registration statement
ii. Registered investment house; ➢ refuse registration of the security
iii. Insurance company; ➢ revoke the affectivity of a registration statement and the registration of
iv. Pension fund or retirement plan maintained by the Government of the Philippines or any the security there-under.
political subdivision thereof or manage by a bank or other persons authorized by the
Bangko Sentral to engage in trust functions;
v. Investment company or; Requisites
vi. Such other person as the Commission may rule by determine as qualified buyers, on the 1. Based on grounds provided by law
basis of such factors as financial sophistication, net worth, knowledge, and experience in
2. Due notice and hearing
financial and business matters, or amount of assets under management.

Grounds for Rejection and Revocation of Grounds for Rejection and Revocation of
Registration of Securities Registration of Securities
1. The issuer:
2. The registration statement is
i. Has been judicially declared insolvent; i. on its face incomplete or
ii. Has violated any of the provision of SRC, rules, regulations and ii. inaccurate in any material respect or
orders of the SEC;
iii. includes any untrue statements of a material
iii. Has been or is engaged or is about to engage in fraudulent
transactions;
3. The issuer, any officer, director or controlling person performing
iv. Has made any false or misleading representation of material facts
similar functions, or any under writer has been convicted of an offense
in any prospectus concerning the issuer or its securities;
involving moral turpitude and /or fraud or is enjoined or restrained by
v. Has failed to comply with any requirements that the Commission the Commission or other competent or administrative body for
relative to registration violations of securities, commodities, and other related laws.

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Amendment to the Registration Statement Regulation of Pre-Need Plans

If a registration statement is on its face incomplete or inaccurate in any No person shall sell or offer for sale to the public any pre-need plan except
material respect, the SEC shall issue an order directing the amendment of in accordance with rules and regulations which the Commission shall
the registration statement. prescribe.

Upon compliance with such order, the amended registration statement shall Such rules shall regulate the sale of pre-need plans by, among other things,
become effective.
1. requiring the registration of pre-need plans
2. licensing persons involved in the sale of pre-need plans
3. requiring disclosures to prospective plan holders
4. prescribing advertising guidelines
5. providing for uniform accounting system, reports and recording keeping with
respect to such plans, imposing capital, bonding and other financial
responsibility, and
6. establishing trust funds for the payment of benefits under such plans.

Devices and Practices for the Manipulation

of Security Prices Methods of Creating False or Misleading
It is unlawful for any person acting for himself or through a dealer or broker, Appearance of Active Trading
directly or indirectly:
❖ To create a false or misleading appearance of active trading in any listed
security traded in an Exchange of any other trading market
WASH SALE
By effecting any transaction in
❖ To circulate or disseminate information that the price of any security listed such security which involves no
in an Exchange will or is likely to rise or fall because of manipulative market change in the beneficial
operations ownership thereof

❖ To make false or misleading statement with respect to any material fact

❖ To effect, either alone or others, any series of transactions for the purchase
and/or sale of any security traded in an Exchange for the purpose of
pegging, fixing or stabilizing the price of such security; unless otherwise
allowed by this Code or by rules of the Commission.

Methods of Creating False or Misleading Methods of Creating False or Misleading

Appearance of Active Trading Appearance of Active Trading
MATCHED ORDERS
By entering an order or orders for Market Rigging or Jiggling
the purchase or sale of such security
By performing similar act where
with the knowledge that a
simultaneous order or orders of there is no change in beneficial
substantially the same size, time and ownership.
price, for the sale or purchase of any
such security, has or will be entered
by or for the same or different
parties

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Regulation of Option Trading Who is an Insider?

It is prohibited to any member of an exchange to directly or indirectly
endorse or guarantee the performance of any put, call, straddle, option
Insider means
or privilege in relation to any security registered on a securities 1. the issuer;
exchange. 2. a director or officer (or any person performing similar functions) of,
or a person controlling the issuer;
“Put” is a transferrable option or offer to deliver a given number or 3. a person whose relationship or former relationship to the issuer gives
shares of stocks at a stated price at any given time during a stated or gave him access to material information about the issuer or the
period. security that is not generally available to the public;
4. A government employee, director, or officer of an exchange, clearing
agency and/or self-regulatory organization who has access to
“Call” is transferable option to buy a specified number of shares at a
material information about an issuer or a security that is not
stated price.
generally available to the public; or
5. a person who learns such information by a communication from any
“Straddle” is a combination of put and call. forgoing insiders.

Insider Trading Insider Trading

Insider trading is the There is no violation of insider
 selling or buying by an insider of a trading when:
security of the issuer,
1. The insider proves that the information was
 while in possession of material
information with respect to the issuer or not gained from such relationship; or
the security 2. If the other party selling to or buying from
 that is not generally available to the the insider (or his agent) is identified, the
public. insider proves:
i. that he disclosed the information to the other
party, or
Insider trading is GENERALLY PROHIBITED.
ii. that he had reason to believe that the other
party otherwise is also in possession of the
information.

Material Non-Public Information Non-Communication of Material Non-Public

Information
Information is "material nonpublic" if:
 It has not been generally disclosed to the public and would  It unlawful for any insider to communicate material nonpublic
likely affect the market price of the security after being
information about the issuer or the security to any person
disseminated to the public and the lapse of a reasonable
who, by virtue of the communication, becomes an insider,
time for the market to absorb the information; or
where the insider communicating the information knows or
has reason to believe that such person will likely buy or sell a
 Would be considered by a reasonable person important security of the issuer whole in possession of such information.
under the circumstances in determining his course of
action whether to buy, sell or hold a security.

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Short-Swing Profit Rule
Under the Short-Swing Profit Rule,
a company insider is required to
return any profit made from the
purchase and sale of company
stock if both transactions occur
within a 6-month period.
Tender Offer
PURPOSES
1. To protect the interest of the minority
stockholders against any scheme that dilutes the
share value of their investments
2. To give the minority shareholders the chance to
exit in the company under reasonable terms
Mandatory Tender Offer
Any person or group of persons acting in concert
who intends to acquire at least 35% of any
class of any equity security of a listed
corporation of any class of any equity security
of a public company.
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Tender Offer
 Tender offer means a publicly announced
intention by a person acting alone or in concert
with other persons to acquire equities of a public
company.
 A tender offer is an offer by the acquiring person
to stockholders of a public company for them to
tender their shares thereon on the terms
specified in the offer.
Public Company
A public company means
✓ any corporation
✓ with a class of equity securities listed in the
Exchange
✓ with an assets in excess of P50,000,000.00
✓ having 200 or more holders
✓ at least 200 of which are holding at least
100 shares of a class of equity securities.
Mandatory Tender Offer
Any person or group of persons
acting in concert who intends to
acquire at least 35% of any class of
any equity security of a listed
corporation of any class of any
equity security of a public company
in one or more transactions within
a period of twelve months(12).
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Mandatory Tender Offer
If any acquisition of even less than
35% would result in ownership of
over 51% of the total outstanding
equity securities of a public
company,
Margin Trading
Margin trading refers to an instance when a
customer purchases stocks by advising only a
portion of the purchase price with the broker
extending credit or making loan for the balance.
Applicability of SRC Rule 68
Rule 68 of the Securities Regulation
Code is applicable to corporations
required to file financial
statements to the SEC.
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Exemption to Mandatory Tender Offer
The mandatory tender offer will not apply to the following instances:
 Any purchase of shares from unissued capital stock provided that the acquisition
will not result to a 50% or more ownership of shares by the purchaser.
 Any purchase of shares from an increase in authorized capital stock
Purchase in connection with foreclosure proceedings involving a duly constituted

pledge or security arrangement where acquisition is made by the debtor or
creditor.
 Purchase in connection with privatization undertaken by the government of the
Philippines
 Purchases in connection with corporate rehabilitation under court supervision
 Purchase through an open market at the prevailing market prices
 Merger or consolidation
SRC RULE 68, AS AMENDED
Corporations Required to File
These corporations required to file financial
statements are those who have met the following
thresholds:
1. Stock corporations with paid-up capital stock of P50,000.00 or
more;
2. Non-stock corporations with total assets of P500,000.00 or more,
or with gross annual receipts of P100,000.00 or more;
3. Branch offices of stock foreign corporations with assigned capital
in the equivalent amount of P1,000,000.00 or more;
4. Branch offices of non-stock corporations with total assets in the
equivalent amount of P1,000,000.00 or more;
5. Regional operating headquarters of foreign corporations with total
revenues in the equivalent amount of P1,000,000.00 or more.
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Financial Reporting Framework
Financial reporting framework means a set of accounting
principles, standards, interpretations and pronouncements
that must be adopted in the preparation and submission of the
annual financial statements of a particular class of entities, as
defined in this Rule by the Commission.
The financial reporting framework includes, but not limited to,
the
 Philippine Financial Reporting Standards
 Philippine Financial Reporting Standards for Small and Medium
Entities.
Error versus Fraud
Error can be distinguished from fraud as follows:
 Error means an unintentional mistake in the financial
statements which reduces or increases the consolidated
total assets, total liabilities or income of the company by
five percent (5%).
 Fraud means an intentional act by one or more
individuals among management, employees, or third
parties that results in a misrepresentation of financial
statements which reduces or increases the consolidated
total assets, total liabilities or income of the company by
five percent (5%).
Materiality of Information
 An information is material when its omission or
misstatement could influence the economic decisions
of its users.
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Financial Reporting Framework
SEC considers the pronouncements and
interpretation of the following bodies in
prescribing the applicable financial reporting
framework for a particular class or sub-class of
entities:
1. The primary regulator of the entities concerned, e.g.,
the Bangko Sentral ng Pilipinas and Insurance
Commission;
2. Philippine Financial Reporting Standards Council; or
3. International Accounting Standards Board.
Cases Involving Error or Fraud
The following instances may involve an error:
 Mathematical or clerical mistakes in the underlying records and accounting data;
 Oversight or misinterpretation of facts; or
 Unintentional misapplication of accounting policies.
On the other hand, fraud may involve:
 Manipulation, falsification or alteration of records or documents;
 Misappropriation of assets;
 Suppression or omission of the effects of transactions from records or documents;
 Recording of transactions without substance;
 Intentional misapplication of accounting policies; or
 Omission of material information.
Guidelines to Financial Statement
Preparations
Financial statements are prepared and filed with the
SEC in accordance with the financial reporting
framework.
For this purpose and to determine the applicable
financial reporting framework, entities are classified
into
1. large and/or publicly-accountable entities,
2. small and medium-sized entities, and
3. micro entities.
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Large and/or Publicly-Accountable Entities Applicable Financial Reporting Framework

for Large and/or Publicly-Accountable
Large or publicly accountable entities are those that meet any of
the following criteria: Entities
 Large and/or publicly-accountable entities will use as their financial
1. Total assets of more than P350 Million or total liabilities of more
reporting framework the Philippine Financial Reporting Standards
than P250 Million; or (“PFRS”) as adopted by the SEC.
2. Are required to file financial statements under Part II of SRC
Rule 68; or
 However, a set of financial reporting framework other than the PFRS
3. Are in the process of filing their financial statements for the may be allowed by the SEC for certain sub-class (e.g., banks,
purpose of issuing any class of instruments in a public market; or insurance companies) of these entities upon consideration of the
pronouncements or interpretations of any of the bodies recognized by
4. Are holders of secondary licenses issued by regulatory agencies.
SEC.

Small and Medium-Sized Entities Applicable Financial Reporting Framework

Small and medium-sized entities (SMEs) are those that meet all
of the following criteria:
1. Total assets of between P3M to P350 Million or total liabilities
of between P3M to P250 Million. If the entity is a parent
for Small and Medium-Sized Entities
1. SMEs will use as their financial reporting framework the Philippine Financial Reporting
Standards for SMEs (“PFRS for SMEs”) as adopted by the SEC.
2. However, the following SMEs shall be exempt from the mandatory adoption of the PFRS for
SMEs and may instead apply, at their option, the PFRS:

company, the said amounts shall be based on the consolidated 3. An SME which is a subsidiary of a parent company reporting under the PFRS;
figures; 4. An SME which is a subsidiary of a foreign parent company which will be moving towards
International Financial Reporting Standards (“IFRS”) pursuant to the foreign country’s
2. Are not required to file financial statements under Part II of published convergence plan;
SRC Rule 68; 5. An SME which is a subsidiary of a foreign parent company and has been applying the
standards for a non-publicly accountable entity for local reporting purposes.
3. Are not in the process of filing their financial statements for
6. An SME, either as a significant joint venture or associate, is part of a group that is reporting
the purpose of issuing any class of instruments in a public under the PFRS;
market; and 7. An SME which is a branch office or regional operating headquarter of a foreign company
4. Are not holders of secondary licenses issued by regulatory reporting under the IFRS;

agencies. 8. An SME which has a subsidiary that is mandated to report under the PFRS;

Applicable Financial Reporting Framework Micro Entities

for Small and Medium-Sized Entities
1. An SME which has a short term projection that show that it will breach the quantitative Micro entities are those that meet all of the
thresholds set in the criteria for an SME. The breach is expected to be significant and
continuing due to its long-term effect on the company’s asset or liability size; following criteria:
2. An SME which has a concrete plan to conduct an initial public offering within the next two 1. Total assets and liabilities are below P3 Million;
(2) years; An SME which has been preparing financial statements using PFRS and has decided
to liquidate; 2. Are not required to file financial statements under Part II of SRC Rule 68;
3. Such other cases that the Commission may consider as valid exceptions from the mandatory 3. Are not in the process of filing their financial statements for the purpose
adoption of PFRS for SMEs. of issuing any class of instruments in a public market; and
4. Are not holders of secondary licenses issued by regulatory agencies.

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Applicable Financial Reporting Framework
for Micro Entities
Micro entities have the option to use as their
financial reporting framework either the income tax
basis, accounting standards in effect as of
December 31, 2004 or PFRS for SMEs.
Statement of Management’s Responsibility
The Statement of Management’s Responsibility (SMR) for Financial
Statements is a declaration by the management that they are responsible
for the preparation and fair presentation of the financial statements of
the company in a given reporting period.
This responsibility includes:
 designing and implementing internal controls relevant to the preparation
and fair presentation of financial statements that are free from materials
misstatements, whether due to fraud or error;
 selecting and applying appropriate accounting policies; and
 making accounting estimates that are responsible in the circumstances.
The SMR will be attached to the financial statements.
Independent Auditor
An independent auditor refers to an auditor who fully
meets the requirements of independence as provided
for in the Code of Ethics for Professional Accountants
in the Philippines and under SRC Rule 68.
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Responsibility for Financial Statements
The MANAGEMENT has the primarily the responsibility of the
filing of financial statements.
The responsibility covers the fairness of the representations
made therein.
The Board of Directors reviews and approves the financial
statements before these are submitted to the stockholders.
Signatories of Statement of Management’s
Responsibility
✓ The Chairman of the Board
✓ Chief Executive Officer
✓ Chief Financial Officer, or
✓ any person of equivalent position as prescribed by the
corporate by-laws
Failure of any of the prescribed signatories to sign the SMR
constitutes a material deficiency in the financial statements.
For branch offices or regional operating headquarters of foreign
corporation, the local manager who is in charge of its
operations within the Philippines will sign the SMR.
Independent Auditor’s Responsibility for
Financial Statements
The independent auditor’s responsibility for the financial statements
required to be filed with the SEC is confined to the expression of
his opinion on such statements which he has examined.
The management shall neither allow nor require its independent
auditor to prepare its financial statements and/or any of its
supporting documents.
The independent auditor’s duty is to conduct an independent
examination of the company’s financial statements and supporting
documents pursuant to the prescribed auditing standards and
practices.
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Independent Auditor and its Responsibility Audit Reports of Independent Auditors

for Financial Statements The auditor’s report shall:

The independent auditor must be duly registered with 1. Be dated;

the Board of Accountancy (BOA) of the Professional 2. Be signed by the certifying independent auditor;

Regulatory Commission (PRC) in accordance with the 3. Identify the financial statements covered by the report;

rules and regulations of said professional regulatory
bodies.
A corporation with financial statements audited by
independent auditor who is not registered with the
BOA shall be subject to appropriate fines.
4. State the signing accountant’s license, Tax Identification and PTR
Numbers and registration number with BOA including its
expiration date
5. State the complete mailing address of the client and the auditor;
6. In the case of an auditing firm, certifying partner shall sign his
own signature and shall indicate that he is signing for the firm,
the name of which is printed in the report.

Audit Reports of Independent Auditors Audit Reports of Independent Auditors

Also, the following must be contained in the auditor’s
report:
1. The signing auditor/partner’s accreditation number, category and
expiration of accreditation. In case of an auditing firm, the same
information with respect to the accreditation of the firm shall be
indicated.
2. Statement that the examination was made in accordance with the
Philippine Standards on Auditing.
3. The opinion of the independent auditor on the fairness of presentation in
conformity with the prescribed financial reporting framework for the
company.
Unless exempted, the external auditor of a company which
has incurred a capital deficiency, shall provide in the audit
report an emphasis paragraph indicating the following
information:
1. The fact that the company has incurred a capital deficiency that raises
an issue on its going concern status;
2. A brief discussion of a concrete plan of the company to address the
capital deficiency and reference to the note to financial statements that
provides a complete disclosure of the said plan;
3. A statement that the auditor conducted sufficient audit procedures to
verify the validity of the aforementioned plan.

Audit Reports of Independent Auditors

✓ In case the company fails to present to the external auditor a concrete
plan or sufficient supporting documents to address the capital
deficiency, the auditor shall provide an emphasis paragraph indicating
that the company is no longer a going concern and should use liquidation
basis in the preparation of its financial statements.
THANK YOU!
✓ The independent auditor shall likewise consider other instances, e.g., attycapzcpa
loss of major market/customers or ban of major product, which would
raise an issue on going concern status of the company and that, shall
require an emphasis paragraph in his report.
✓

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