A corporation or sole proprietor may be interested in soliciting, accepting or taking investments/placements from friends or family or from the public to fund or expand their business ventures.

However, business owners must take note that the act of solicitation might fall within the purview of a “security” which is regulated by law, specifically by the Securities Regulation Code (the “Code”). "Securities" are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character. Securities include investment contracts which have been the subject of controversy before courts in the Philippines. This is because of the proliferation of fraudulent securities victimizing unsuspecting investors.

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An investment contract, which is a type of security, must be registered with the Securities and Exchange Commission (“SEC”) before its sale or offer for sale or distribution to the public. This regulation safeguards the investing public from fraudulent securities. The strict regulation of securities is founded on the premise that the capital markets depend on the investing public’s level of confidence in the system. (Power Homes Unlimited Corporation v. SEC, G.R. No. 164182, 26 February 2008)

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To determine whether or not the security being offered takes the form of an investment contract, the Howey test is employed.

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Under the Howey test, the following must concur for an investment contract to exist: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others.

However, there are certain exceptions to the general rule of registration. Securities need not be registered if it is considered an exempt security or if the securities are sold in any exempt transaction specifically enumerated under the Code.

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Disclaimer: This article is for informational purposes only and should not be considered legal advice. For specific guidance on whether you need to register your securities with the SEC, consult with a legal professional or business advisor.

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Padin & Partners Law Offices is a full-service law firm that caters to business registration and regulatory compliance concerns in Cebu City, Philippines. For consultations, book an appointment or reach us at  +63 (32) 316-1540 or +63 917 188 0361.

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