Unregistered securitiesBy Raul J. Palabrica Jr.
Philippine Daily Inquirer
Barring any unexpected hitches, seven British and Australian nationals and one Filipino will be arraigned in court on August 14 for selling unregistered securities to the public.
The accused are officers of Nomad Sports Club, a non-stock, non-profit corporation based in Parañaque City. At prices ranging from P75,000 to P20,000, the club offers non-proprietary membership certificates to interested parties.
The certificate holders are entitled to use the club’s sports facilities depending on their membership status.
In 2008, two members who were disgruntled with the way the club was being managed filed a complaint in the Securities and Exchange Commission questioning the club’s authority to offer or sell securities to the public without the benefit of prior SEC registration.
The club argued that the certificates did not fall within the definition of securities under the Securities Regulation Code, or that the solicitation could be considered public in character because the information or announcement about it was limited to its general membership.
It did not deny, however, that its membership rates were advertised on its website and that applications for membership can be downloaded through that facility.
After proper investigation, with the club given the opportunity to present its side, the SEC filed a complaint in the Department of Justice against the persons earlier named for violation of the code.
The SEC said the membership certificates were in the nature of securities (or shares, participation or interests in a corporation or commercial enterprise) that were offered or sold to the general public through flyers and other advertising means.
With such features, the certificates are, for the protection of the investing public, required to be filed in and registered with the SEC before they can be made available to the public.
The DoJ gave credence to the SEC’s complaint and ordered the filing of criminal charges against the club’s officers. The club’s motion for reconsideration of such order was denied last week.
The ruling is timely in the wake of the proliferation of businesses in the country that are managed or operated, directly or indirectly, by South Koreans.
What supposedly started as a desire to learn the English language from Filipino mentors has evolved into a virtual South Korean economic invasion of the country.
No longer confined to Metro Manila, South Korean restaurants, groceries, laundry shops, language schools and churches are a ubiquitous presence in practically all the major urban centers.
The South Koreans’ level of investment sophistication has gone beyond the mom-and-pop or all-Korean capitalists type of business.
Through the use of dummies or surrogates, some South Koreans have managed to organize businesses that have or can gain access to public financing through the sale of equity or debt securities.
These businesses are in the form of sports clubs, wellness (or spa) centers, hotel and resort facilities, and other similar entities whose capital requirements are high.
The modus operandi is similar to that of Nomad Sports Club—membership or investment certificates are offered or sold to interested parties on the sly, but this time with assurances of guaranteed high returns or regular cash dividends.
To make the offering more inviting, the certificates or documents issued are made to appear that it is backed by a reputable South Korean bank or multinational South Korean company with a strong name recall.
Printed in high-quality paper, with embellishments that project an image of sophistication, the documents can give the gilt-edged certificates issued by iconic investment companies a run for their money.
Forewarned is to be forearmed. If you receive an offering to invest or contribute in any of such business, the first thing you should do is inquire about its personality.
Is it registered with the SEC? How long has it been in operation? Does it submit the required annual general information sheet and audited financial statements?
The fact that a company is registered with the SEC does not, however, mean that it is authorized to sell investment certificates, membership shares or other forms of securities in order to raise funds.
Under existing regulations, those corporate instruments can be issued or sold to the public only after they have been filed in and reviewed by the SEC.
The evaluation process is aimed at making sure the company truthfully discloses the identity of the people behind it, its financial standing, its future plans and the events or risks that may affect its ability to live up to its commitments or pay back its investors. If the documents pass muster, the company is issued a “secondary license” for that purpose.
These disclosures are meant to guide the investor in deciding on whether or not it makes good business sense to buy the securities offered. In case (knock on wood) the company sinks, the investor has nobody to blame but himself for the bad investment.
Incidentally, the penalty for offering or selling unregistered securities is a fine of not less than P50,000 but not more than P5 million, or a prison term of at least seven years but not to exceed 21 years, or both.
(For feedback, write to <rpalabrica@inquirer. com. ph>.)
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