What are securities:
- These are promissory notes, bonds, and debentures - It involves money
-
They are broadly defined as instruments evidencing an investment in a commercial enterprise, ie stock corporationsWhen are they used: When companies expand to address the higher demand of its operations, they raise money by securing funds by reclassifying the original or the organizer’s common shares as founder’s shares and issuing common shares for new investors (which requires SEC approval).
Founders Shares: Exclusive right to be elected in the BOD for a maximum period of five years from approval. After said period, they become regular common shares and the AOI is amended.
Q: What if a corporation needs more working capital and is to be sourced from the public: There are rules on the solicitation of investments
PUBLIC: More than 19 persons, natural or juridical What are these RULES ON SOLICITATION OF INVESTMENTS
1. Before printing the brochures and other marketing documents, the corporation should apply for the registration of its securities with the SEC
2. There are two forms of investments in a commercial enterprise a. By lending money
b. By becoming a part owner of an enterprise
What is a COMMERCIAL ENTERPRISE: One engaged in
commerce, or in buying and selling (stock corporations)
Are non-stock corporations covered by the securities law: It
is still pending determination. Non-stock corporations engage in limited commercial transactions and only for the benefit of its members.
Investment in form of a loan / Lending money: When a corporation borrows money and signs a promissory note
What is a PROMISSORY NOTE: It is a form of securities (where the
maker promises to pay back the amount borrowed), as when a corporation borrows money and promises to pay it back
What is a BOND: It is a promissory note with a term exceed five
years, as when a corporation promises to pay on the PN at least until after 5y
What are DEBENTURES: It is a bond secured by properties, as when
a corporation secured its investments with a real estate mortgage
Investment by being a part owner: Raising capital via stock ownership
Q: How does one make an investment, not as a loan but, as a co-investor: One
can invest in shares. It can be in preferred shares where there is a regular return of income, or in redeemable and convertible preferred shares.
PREFERRED SHARES: Shares with the usual preferences on profits and assets. eg Those guaranteed with a 10% per annum income or dividends. (THUS, they are payable only if the corporation has surplus profits).
PREFERRED REDEEMABLE SHARES: Those where the corporation reserves the right to buy it back within a certain period. PREFERRED REDEEMABLE AND CONVERTIBLE: Those with an added feature that if the corporation fails to redeem the shares, the stockholder has the option to convert the preferred shares into common shares
PREFERRED PARTICIPATING: Those which join the common stockholders in receiving additional dividends. There are none in the Ph.
Q: If there are no profits this year and thus no dividend, what happens if there are earnings next year: Shares could either be
CUMULATIVE or NON-CUMULATIVE.
CUMULATIVE PREFERRED SHARES: Those which receive what is not received in prior years due to absence of surplus
NON-CUMULATIVE PREFERRED SHARES: Prior profits cannot be received in the future. It must be expressly stipulated.
What is SUFFICIENT SURPLUS: eg Corporation has P50k dividends
payable, but it has P49,999. There is surplus but no one gets any dividends because surplus is not sufficient.
Q: What if investors come in as stockholders or part owners? A: Issue certificates of stock
Q: If investments in form of stock, what shares?
A: Shares can be common or preferred, but preferred has variations. Ex Redeemable, convertible, cumulative, non-cumulative, participating, non- participating.
When redeemable, corporation reserves the right to buy back shares after a certain period. Option is with the corporation. It can’t be forced to buy back shares. Redemption is a right and not a duty.
Convertible – preferred shares becomes common after a certain period. Q: Can a corporation redeem if it has no surplus profits?
A: Yes, it is not in violation of the trust fund doctrine. However, the corporation shouldn’t redeem shares if as a consequence of redemption, it won’t be able to carry out its primary purpose.
Q: How do corporations entice the public: The corporation makes FINANCIAL PROJECTIONS.
1.
A commercial enterprise must first apply its securities for registration with the SEC before it can cause the printing of its marketing materials. It must file a REGISTRATION STATEMENT with SEC. It is a document where the SEC requirements are attached.a.
Why: To protect the public from being defrauded by allowingthem to determine whether the corp. is in a sound condition
b.
What is an AUDITED FINANCIAL STATEMENT: It is aschedule or breakdown of the corporation’s receivables. Do not take it on its face value.
2.
The form of investment can either be a promissory note, bond, debentures, certificate of preferred or common shares. Preferred shares can be redeemable or convertible.3.
If the corporation intends to raise capital via stock ownership, it must apply for listing of its shares in the Ph Stocks Exchange after registering the securities with SEC. If investments are in the form of shares or equity participation, after SEC registration, corporation applies for listing with the PSE.What is the PHILIPPINE STOCKS EXCHANGE: It is the Philippine stock market
Why are shares listed therein
- To raise capital, by making an Initial Public Offering
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To have a convenient facility for shareholders to buy and sell shares of stock through the exchange or LISTING BY INTRODUCTION. This is listing without the intent to raise capitalTHUS, if you want to buy or sell shares, you can transact in a matter of seconds. Where there is no market and you need eggs, you would have to look for people who sell eggs.
BUYING AND SELLING: trading
EXCHANGE: In securities law, it is a corporation organized and licensed by the SEC to put up and operate facilities for the purpose of trading securities. It is barter or market or palengke in civil law.
Note: There used to be a PSE in Makati and in Manila. They were merged.
Note: Registration in the SEC is not a guarantee or assurance of listing in the
PSE. According to the SC (Puerto Azul Case), SEC cannot force PSE to list shares. While SEC has supervision, it may not impose on the exchange.
Note: Not all securities are required to be registered in SEC.
What are EXEMPT SECURITIES
1.
Those issued by the Ph Gov’t or any of its political subdivisionsWhy: Because the government will never defraud its citizens
2.
Those issued by Foreign Gov’ts with diplomatic ties with the Ph3.
Those issued by receivers in insolvencyWhy: Because it undergoes judicial scrutiny
4.
Those issued by corporations under the supervision of the BIR,Note: Pre-need contracts are included in the jurisdiction of the IC
5. Those issued by banks other than its own shares of stock
Why: Because banks engage in daily transactions with the people. If
they are required to list securities, then it will never accept time deposits
PRE-NEED CONTRACTS: Contracts wherein a corporation, in consideration of a promise of another to deliver an agreed amount in lump sum or in installments, agrees to deliver an agreed amount or to render a particular service upon the arrival of a period or the happening of an event; eg educational plans, memorial plans (which includes internment fee plans)
Example: B anticipates the death and internment expenses of his
mother-in-law. Thus, he buys a burial lot at present. Is it a pre-need contract? NO, even if it is in anticipation of a future need. There is no particular service or delivery of money to be rendered by the corporation. Here, the contract is a sale on installments.
What are EXEMPT TRANSACTIONS: May require prior registration, but may apply for exemption. Its types are Certificated or Uncertificated
UNCERTIFICATED CERTIFICATED
- When securities bought are sold as soon as the prices go up
- These are paperless securities, where ownership is evidenced by electronic records only. Records are also kept by the PSE, the broker, and the salesman, thus, it is not entirely paperless
- The broker prepares a PURCHASE
CONFIRMATION or SALE
CONFIRMATION, showing the number of shares bought or sold, the price, and from/to what company it was purchased/sold, and the commission - Easier to sell
- When securities are bought or sold to build up stock ownership; it is a long-term plan
- Stock ownership is covered by certificates of stock
- It takes longer to sell because certificated stock ownership cannot be sold right away as the broker must have these certificates validated first (which takes 5 days)
How to Trade Stocks
1. Engage the services of a broker
What is a BROKER: Corporations licensed by SEC to buy and sell securities for their clients or on their behalf.
How much commission do brokers receive: It depends but
the maximum is 2% of the volume. They are paid because they do the legwork in the SEC and BIR.
Who are PERSONS ASSOCIATED WITH BROKERS: A corporation acts through its agents or officers known as persons associated with brokers. They are also licensed.
Note: Only corporations can be licensed as brokers because
individuals and partnerships can die.
Who are DEALERS: Corporations licensed by the SEC to buy and sell securities for its own account.
PERSONS ASSOCIATED WITH BROKER
DEALER Acts for clients always
Earns commissions
Does not invest its own money
Acts for its own account, for itself Males profits and suffers loss Invests its own money
Who are SALESMEN: Persons representing stock brokers inside the trading floor of the PSE and accepting orders for buying or selling from clients of the broker. They also get a license, but a license is issued to salesmen is also only for a specific broker
Note: All transactions in the PSE are conducted through the telephone Note: The trading hours of the PSE is from 0930-1200, 1300-1530. It is
the time when you can buy or sell shares through the exchange
Note: Where do you find brokers? In their offices!
Note: All participants except investors are licensed. Licensing is annual.
2.
The salesman, who has a cubicle in the PSE, then makes a post of the shares that a client wants to buy or sell, in the computer of the PSE. Orders to buy are then matched with orders to sell. Once they are matched, the orders are removed in the computer.Q: If shares are listed in the PSE, can you still sell directly to the buyer or buy directly from the seller? YES, OVER-THE-COUNTER TRANSACTIONS are
allowed! It is the buying or selling of shares listed in the PSE but made directly between the parties and no longer coursed through the exchange.
ADVANTAGE:
- The buyer does not have to pay the broker’s commission and stock transfer tax, and the seller only pays CGT (if there is gain) and DST.
Note: Tax avoidance scheme is to sell shares worth
P100,000 today and then the rest tomorrow so that the tax rate applicable is only 5%.
- Hassle-free because the broker does all the work DISADVANTAGES:
- Buyer might be buying shares covered by fictitious certificates of stock. In the PSE, certificated stock ownership cannot be sold right away because the broker must have these certificates validated first (which takes 5 days). (THUS, uncertificated SS are easier to sell) - Parties themselves do the legwork
There are 3 participants in a market: 1.) Producer
2.) Buyer
3.) Seller/Intermediary
What are the different financial markets? 1.) Money market
2.) Capital market 3.) Bond market 4.) Stock market
Money Market – a source of funds, payment period not more than a year Capital Market – payment period is over a year but less than 5 years Bond Market – payment period is more than 5 years
Stock Market – Source of funds for equity participation
Money market placements are made through a bank. A bank finds funds
through time depositors (usually) and after getting their consent, the amount is loaned to the borrower. The bank is a mere intermediary.
Licensing – persons associated with broker may only use the license with a
particular broker. If you move between brokers, you must get a new license.
What is MARGIN TRADING: Trading is buy and sell. It is an arrangement with the broker where the investor has not much money and the broker advances part of the purchase price in the form of a loan.
C: Broker does not use its own money, they use money of the client. Eventually, buyer may ask broker to advance money. This is called margin trading, the broker pays part of the purchase price.
What are SHORT SALES: It occurs when a person sells shares he does not own while the prices are up, but he later on buys back such same shares when the prices are down, so he can return and deliver such shares which he had earlier sold. In other words, the seller sells shares he borrowed and does not own, but later he has to buy the same shares. This is legal.
What are WASH SALES: These are illegal. It is a stock price manipulation. eg Case of BW Resources, Corp. It is a bingo company, whose shares has a par value of P1. Over the years, the market value of its shares rose to P2. Through manipulation, its market value very quickly became P107 each. The next day, it fell to P7. THUS, those who bought the shares at P107 suffered loss of P100 per share. It is because of this that he PSE became very strict!
PSE RULE: When there is an unusual increase or decrease in the prices of shares, the PSE suspends the trading of the shares of such corporation to investigate the cause of the increase or decrease. There is unusual increase or decrease when the value of the shares increases or decreases by 10% in a day’s transaction.
What is a TENDER-OFFER: When a person or group of persons representing the same interests wants to acquire: (a) at least 15% of a listed company or (b) at least 15% of a company that is not listed but with assets worth P50M or more and with no less than 200 stockholders, each owning no less than 100 shares, (c) at least 30% of any of said companies, within a period of twelve months, makes a formal offer with the SEC, stating the price they are willing to pay and the terms of payment. Upon approval by the SEC, such person or group of persons can make announcements in newspapers.
Securities Regulation Code: SEC. 19. Tender Offers. –19.1. (a) Any person or group of persons acting in concert who intends to acquire at least fifteen per cent (15%) of any class of any equity security of a listed corporation or of any class of any equity security of a corporation with assets of at least Fifty Million
Pesos (P50,000,000.00) and having two hundred (200) or more stockholders with at least one hundred (100) shares each or who intends to acquire at least thirty per cent (30%) of such equity over a period of twelve (12) months shall make a tender offer to stockholders by filing with the Commission a declaration to that effect; and furnish the issuer, a statement containing such of the information required in Section 17 of this Code as the Commission may prescribe. Such person or group of persons shall publish all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such a security. Copies of any additional material soliciting or requesting such tender offers subsequent to the initial solicitation or request shall contain such information as the Commission may prescribe, and shall be filed with the Commission and sent to the issuer not later than the time copies of such materials are first published or sent or given to security holders.
OPEN: The price paid for the very first transaction of the day CLOSE: The price paid for the last transaction of the day LOW: The lowest price in between the trading hours HIGH: The highest price of the day
VOLUME: All shares of the corporation traded for the day
What are CLASS A and CLASS B SHARES: Class B shares are more expensive BUT they are exactly the same and identical shares. They are classified to comply with the citizenship requirement of the Constitution and only for the purpose of monitoring stock ownership.
eg MERALCO, which is engaged in public service, classified its shares into Class A and B. Class A shares comprise 60% and are allowed only for Filipinos. Class B shares comprise 40% and are sold to aliens. Class B shares are more expensive because there are less of it and thus the law of supply and demand.
STRADDLE, PUT, and CALL
PUT: A contract which gives the holder the right to buy a specified number of shares for a specified price for a particular (definite) period
CALL: A contract which gives the holder the right to sell a specified number of shares for a specified price for a particular (definite) period
STRADDLE: Combination of both
What is BACKDOOR LISTING: It is a legal scheme where a corporation which wants to avoid the hassle of listing instead acquires the controlling interest a corporation (2/3 of OCS) whose shares are already listed in the PSE but which corporation is no longer operating (DOORMAN CORPORATIONS). It then merges with the doorman corporation and in the merger, it is the doorman corporation that survives.
Example: Case of Urban Development Bank and EI Bank. Urban
Bank was a universal bank whose shares are listed. UB, however, could no longer comply with the increased paid up capital requirement of the BSP and it thus downgraded to a commercial bank. The result was a bank run and holiday; it never reopened until the EI Bank wanted its own shares to be listed and thus acquired and merged with UDB. UDB was the surviving corp. but its name was changed to Export and Industry Bank.
BLUE-SKY LAW – any law relating to investments
INSIDER – Could be a stockholder, officer, director or employee who because
of relation with corporation has information not available to public which information could influence the price of shares of the corporation. An insider need not necessarily be a member of a corporation but one who derives information from another.
NOTE: Original and exclusive jurisdiction over intracorporate controversies is
no longer with SEC but with the RTC having jurisdiction over the principal place of business.
FINAL NOTE: 09178012694. Text Sir for questions and, most importantly, when we pass the Bar