UNDERSTANDING THE SALIENT FEATURES

OF THE SECURITIES REGULATION ACT-RA8799

WHY IS THE SECURITIES REGULATION ACT A BLUE SKY LAW

It is a “blue sky law” because it aims to protect the investing public from speculative
schemes which have no more basis than as many feet of blue sky.

The term has been said have arose from the practice of unscrupulous salesmen, dealers
and brokers who induce the investing public to buy shares or securities which supposedly
represent interest in and/or issued by companies operating distant oil wells or gold mines
where the sky is always blue.

A blue sky law is one that provides for the regulation of the sale of securities for the
purpose of preventing fraud.

WHAT IS THE STATE POLICY BEHIND THE ENACTMENT OF RA 8799

Declaration of State Policy – The state shall (a) establish a socially conscious, free
market that regulates itself, (b) encourage the widest participation of ownership in
enterprises, (c) enhance the democratization of wealth, (d) promote the development of
the capital market, (e) protect investors, (f) ensure full and fair disclosure about
securities, (g) minimize if not totally eliminate insider trading and other fraudulent or
manipulative devices and practices which create distortions in free market.
​
WHAT IS THE SIGNIFICANCE OF A DECLARATION OF POLICY

Any doubt in the interpretation of these Rules shall be resolved by the Commission in the
manner which would establish or lead to the attainment of the declared policies.

WHAT AGENCY IS TASKED TO IMPLEMENT THE PROVISIONS OF THE ACT

The Securities and Exchange Commission is the primary agency entrusted with the
implementation of the Act.

1. ​Note that the cases previously under its jurisdiction but have been transferred to
the Regional Trial Court are:

1.1 ​Devices and schemes employed by or any acts of the Board of Directors and/or
the stockholder, partners, members of association and organization, business associates,
its officers or partners amounting to fraud, and misrepresentation which may be
detrimental to the interest of the public registered with the Commission.

1.1.1 ​It is essential that the existence of fraud and/or misrepresentation be ade
adequately alleged in relation to the schemes or devises.

1.2 ​Controversies arising out of intra-corporate or partnership relations, between and

among stockholders, members, or associations between any or all of them ad the
corporation, partnership or association of which they are stockholders, members, or
association of which they are stockholders, members or association respectively between
such corporation, partnership, or association and the state in so far as it concerns their
individual franchise or right to exist as such entity

1.2.1 ​For an intra-corporate dispute to exist there must be an intra-corporate

relationship and the controversy must arise from the said relationship. The controversy
must be intrinsically connected with the regulation of the internal affairs of the
corporation.
​
1.2.2 ​Jurisdiction is determined by (1) the status of the relationship between the parties,
and (2) nature of the question that is the subject of the controversy. Hence, if the dispute
rd
is between two corporations and when there is a 3 person involved and the conflict
arises among those assuming the formation of a corporation and who therefore know that
it has not yet been registered, there is no intra-corporate dispute.

1.2.3 ​If the thrust of the main action is intra-corporate, the SEC (Special Commercial
Court) should take cognizance in its entirety, otherwise, jurisdiction is with the regular
courts. When the controversy involves the contractual rights and obligations of the
parties/stockholders and not the enforcement of rights and obligations under the
Corporation Code, jurisdiction belongs to the regular courts.

1.2.4 ​When an action is brought by a person seeking to register as a stockholder

pursuant to an alleged sale, jurisdiction is with the regular courts as he is not yet a
stockholder. If the action is brought by a person to issue a certificate of stock, he is
seeking to enforce his right as a stockholder, hence jurisdiction is with the SEC.

1.3 ​Controversies in the election or appointment of directors, trustees, officers, or

managers of such corporation, partnership or association

1.3.1 A dismissal of a corporate office is always a corporate act and/or an intra-corporate

dispute. (Lozon vs. NLRC, 240 SCRA 1).

1.3.2 ​It is the SEC (Special Commercial Court) that has original and exclusive
jurisdiction over case involving removal from employment of corporate officers.

1.3.3 ​The guidelines to determine whether it is to be filed before the SEC (Special
Commercial Court) are as follows: The position is created by the Board, it is mentioned
in the By-Laws, power to appoint is vested in the Board, and election or non-election to
the position is determined by the Board. If however, the main issue is for the recovery of
unpaid wages and separation pay, it is considered a labor dispute within the jurisdiction
of the NLRC. Hence, the SEC (Special Commercial Court) has no jurisdiction if the
action does not involve the assertion of rights as an officer or a question of his removal or
ouster.

1.4 ​Petitions for suspension of payments or corporate rehabilitation.

DEFINITION OF TERMS

“Issuer” is the originator, maker, obligor, or creator of the security

“Broker” is a person engaged in the business of buying and selling securities for the
account of others

“Dealer” means any person who buys and sells securities for his/her account in the
ordinary course of business.

“Associated person of a broker or dealer” is an employee thereof who, directly exercises

control of supervisory authority, but does not include a salesman, or an agent or a person
whose functions are solely clerical or ministerial.

“Clearing agency” is any person who acts as intermediary in making deliveries upon
payment to effect settlement in securities transactions.

“Exchange” is an organized marketplace or facility that brings together buyers and sellers
and executes trades of securities and/or commodities.

“Insider” means: (a) the issuer; (b) a director or office (or person performing similar
functions) of, or a person controlling the issuer; (c) a person whose relationship or former
relationship to the issuer gives or gave him access to material information bout the issuer
or the security that is not generally available to the public; (d) a government employee, or
director, or officer of an exchange, clearing agency, and/or self-regulatory organization
who ahs access to material information about an issuer or a security that is not generally
available to the public; or (e) a person who learns such information by a communication
from any of the foregoing insiders.

“Pre-need plans” are contracts which provide for the performance of future services or
the payment of future monetary consideration at the time of actual need, for which plan
holders pay in cash or installment at stated prices, with or without interest or insurance
coverage and includes life, pension, education, interment, and other plans which the
Commission may from time to time approve.

“Promoter” is a person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receive consideration thereof.
“Prospectus” is the document made by or on behalf of an issuer, underwriter or dealer to
sell or offer securities for ale to the public through registration statement filed with the
Commission.

“Registration Statement” is the application for the registration of the securities required to
be filed with the Commission.

“Salesman” is a natural person, employed as such or as an agent, by a dealer, issuer or

broker to buy and sell securities.

“Uncertificated security” is a security evidenced by electronic or similar records.

“Underwriter” is a person who guarantees on a firm commitment and/or declared best

effort basis the distribution and sale of securities of any kind by another company.

WHAT ARE SECURITIES

In general, securities are Shares, Participation or Interest (SPI) in a Corporation or in a

Commercial enterprise or Profit-making venture (CCP) and evidenced by a Certificate,
Contract; Instrument, whether written or electronic in character (CCI).

Specifically, “Securities” are shares, participation or interests in a corporation or in a

commercial enterprise or profit-making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character. It includes: (a) Shares of stock,
bonds, debentures, notes, evidences of indebtedness, asset-backed securities ​(b) ​
Investment contracts (Investment of money in a common enterprise with an expectation
of profits solely from the efforts of other. They are certificates issued to purchasers who
paid money in expectation of profit from investment or a contact providing for the
investment of capital in a way intended to secure income or profit from its employment.
Example: franchises), certificates of interest or participation in a profit sharing agreement
(A classic example is a contract whereby the buyer furnishes the funds and the seller the
skills for speculating in the stock or commodity market under an arrangement to split any
profits, while a certificate of participation is within the meaning of the term “commercial
paper” where it is a participation in a debt. It is the equity or interest in an enterprise,
being a participation in the profits. It is purely an evidence of indebtedness. Thus, where
a company has a debt, one can have a participation in the amount, which is to be due
from the company), certificates of deposit for a future subscription(c) ​Fractional
undivided interests in oil, gas or other mineral rights ​(d) ​Derivatives (contracts that
presuppose some other conveyance precedent, and only serves to either enlarge, confirm,
alter, restrain, or transfer interest granted by an original conveyance) like options
(Privilege granted to a party to subscribe to a certain portion of unissued stock
within a certain period) and warrants ( a certification giving the holder the right to buy a
stated number of shares of stock in a corporation) ​(e) ​Certificates of
assignments, certificates of participation, trust certificates, voting trust certificates (A
Voting Trust Certificate represents a new profit sharing security or contract issued by the
trustees as kind of association or holding company, of which the charter is the voting
agreement, which hold the underlying securities issued by the corporation) or similar
instruments ​(f) ​Proprietary or non-proprietary membership certificates in
corporations, and ​(g) O​ ther instruments as may in the future be determined by
the Commission.

Evidence of investment in a common enterprise made with the expectation of deriving a

profit solely from the efforts of others who acquire control over the fund invested

ARE PROMISSORY NOTES SECURITIES

Promissory notes have been held to be securities under the Securities Act, as being
evidence of indebtedness, as well as “notes.” Such result has also obtained where such
notes were convertible into shares of a corporation, it being said that, under such
circumstances, the money advanced was an investment, not a loan.

ARE RECEIPTS OF MONEY SECURITIES

Receipts of money lent also have been considered to be evidences of indebtedness under
the Code, where the lenders had the right to have the sums which were advanced
returned, or in the alternative, the right to permit such sums to be used in an investment
scheme and to share in the proceeds thereof.

ARE CERTIFICATES OF DEPOSIT SECURITIES

A certificate of deposit issued for cash by bank, while not a certificate of deposit for
securities and, therefore, not a security under that part of the statutory definition of the
term which relates to such certificates of deposit for securities, nevertheless can be
considered the equivalent of an “evidence of indebtedness” and thus would be a security
within the meaning of the Securities Regulation Code.

WHAT IS MANDATED BEFORE ANY SALE OF SECURITIES CAN BE ALLOWED

Securities Registration is mandated to accomplish its objective of disclosure to potential

investors is the securities registration provisions thereof. In general, the Code makes it
unlawful for any person to sell any security, unless a registration statement is in effect as
to such security.

A security may be registered with the SEC by the filing of a “registration statement”,
which meets the requirement of the Code as to content. The Securities Regulation Code
defines a “registration statement” as the application for the registration of the securities
required to be filed with the Commission. The following acts constitute registration: (a)
filing by the issuer or by any dealer or underwriter interested with the SEC of a sworn
statement with respect to the securities (b) payment of the fees (c) publication of the
filing in two newspapers of general circulation for two (2) consecutive weeks.

Stocks, bonds, notes, convertible debentures, warrants, or other documents that represent
a share in a company or a debt owned by a company or government entity. Evidences of
obligations to pay money or of rights to participate in earnings and distribution of
corporate assets. Instruments giving to their legal holders rights to money or other
property; they are therefore instruments hich have intrinsic value and are recognized and
used as such in the regular channels of commerce.

WHY IS REGISTRATION MANDATED

The reasons for mandating registration are (a) To give adequate protection and reliable
information to the investing public (b) To ensure compliance with the law by the issuer
(c)To allow only an issuer who is solvent, of good repute and character, and whose
business is based on sound business principles.

WHAT SECURITES ARE EXEMPT FROM REGISTRATION

The requirement of registration does not apply to any of the following classes of
securities: (a) any security issued or guaranteed by the Government of the Philippines, or
by any political subdivision or agency thereof, or by any person controlled or supervised
by, and acting as an instrumentality of said Government. EXAMPLE: Treasury Bills (b)
Any security issued or guaranteed by the government of any country with which the
Philippines maintains diplomatic relations, or by any state, province or political
subdivision thereof on the basis of reciprocity: Provided, That the Commission may
require compliance with the form and content of disclosures the Commission may
prescribe. EXAMPLE (c) Certificates issued by a receiver or by a trustee in bankruptcy
duly approved by the proper adjudicatory body (d) Any security or its derivatives the sale
or transfer of which, by law, is under the supervision and regulation of the Office of the
Insurance Commission, Housing and Land Use Regulatory Board, or the Bureau of
Internal Revenue (e) Any security issued by a bank except its own shares of stock. HERE
THERE NO NEED FOR REGISTRATION TO PROVIDE PROTECTION TO THE
INVESTING PUBLIC. THERE IS A BUILT IN PROTECTION IN THE SECURITIES
THEMSELVES BY THEIR VERY NATURE OR OF THE ISSUER HIMSELF

WHAT TRANSACTIONS ARE EXEMPT FROM REGISTRATION

The requirement of registration shall not apply to the sale of any security in any of the
following transactions: (a) At any judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or bankruptcy –THE OBJECT IS
LIQUIDATION OF ASSETS ​(b)By or for the account of a pledge holder, or
mortgagee or any other similar lien holder selling or offering for sale or delivery in the
ordinary course of business and not for the purpose of avoiding the provisions of this
Code, to liquidate a bona fide debt, a security pledged in good faith as security for such
debt- THE OBJECT IS PAYMENT OF THE DEBT(c) An isolated transaction in which
any security is sold, offered for sale, subscription or delivery by the owner thereof, or by
his representative for the owner’s account, such sale or offer for sale, subscription or
delivery not being made in the course of repeated and successive transactions of a like
character by such owner, or on his account by such representative and such owner or
representative not being the underwriter of such security ​(d) The distribution by a
corporation, actively engaged in the business authorized by its articles of incorporation,
or securities to its stockholders or other security holders as a stock dividend or other
distribution out of surplus (e) 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 (f) The issuance of
bonds or notes secured by mortgage upon real estate or tangible personal property, where
the entire mortgage together with all the bonds or notes secured thereby are sold to a
single purchaser at a single sale (g) 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: Provided, That the
security so surrendered has been registered under this Code or was, when sold, exempt
from the provisions of this Code, and that the security issued and delivered in exchange,
if sold at a conversion price, would be at the time of such conversion fall within the class
of securities entitled to registration under this Code. Upon such conversion the par value
of the security surrendered in exchange shall be deemed the price at which the securities
issued and delivered in such exchange are sold (h) Broker’s transactions executed upon
customer’s orders, on any registered Exchange or other trading market (i) Subscriptions
for shares of the capital stock of a corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital stock under the Corporation Code, when
no expense is incurred, or no commission, compensation or remuneration is paid or given
in connection with the sale or disposition of such securities, and only when the purpose
for soliciting, giving or taking of such subscriptions is to comply with the requirements of
such law as to the percentage of the capital stock of a corporation which should be
subscribed before it can be registered and duly incorporated, or its authorized capital
increased (j) The exchange of securities by the issuer with its existing security holders
exclusively, where no commission or other remuneration is paid or given directly or
indirectly for soliciting such exchange (k) The sale of securities by an issuer to fewer
than twenty (20) persons in the Philippines during any twelve-month period (l) The sale
of securities to any number of the following qualified buyers: (a) Bank (b) Registered
investment house (c) Insurance company (d) Pension fund of retirement plan maintained
by the Government of the Philippines or any political subdivision thereof or managed by
a bank or other persons authorized by the Bangko Sentral to engage in trust functions
(e)Investment company; or (f) Such other person as the Commission may by rule
determine as qualified buyers, on the basis of such factors as financial sophistication, net
worth, knowledge, and experience in financial and business matters, or amount of assets
under management. HERE THE BUILT IN PROTECTION IS THE TRANSACTION
ITSELF WHICH GIVES RISE TO THE SECURITIES INVOLVED AS THERE IS
ALREADY THE BUILT-IN PROTECTION WHICH NECESSARILY MAKES THE
SECURITIES SAFE FOR THE INVESTING PUBLIC.

NOTE: The Commission may exempt other transactions, if it find that the requirements
of registration under this Code is not necessary in the public interest or for the protection
of the investors such as by reason of the small amount involved or the limited character
of the public offering.
WHAT OTHER INSTRUMENTS ARE SUBJECT TO REGULATION

Commodity Futures Contracts and Pre-Need Plans are also subject to regulation.

WHAT IS A COMMODITY FUTURES CONTRACT

A Commodity Futures Contract is an agreement whereby the seller binds himself to

deliver a thing or product that will still be produced or manufactured in the future (means
a contract providing for the making or taking of delivery at a prescribed time in the future
of a specific quantity and quality of a commodity or the cash value thereof, which is
customarily offset prior to the delivery date, and includes standardize contracts having the
indicia of commodities futures, commodity options and commodity leverage, or margin
contracts).

The term refers to the purchase in the future of certain types of commodities like oil,
copper, sugar. The purchase shall be at a certain future date. The term refers to a
transaction of buying and selling interest in a contract for physical delivery of
commodities in the future. We are not dealing actually with the physical delivery of
commodities. We are dealing with the buying and selling of interest which is represented
by a piece of paper in a contract for future delivery of commodities. What is being sold
really is the paper representing an interest in a future delivery of commodities. It is not
really the commodity delivery itself that is being sold but the interest.

Commodity means any goods, articles, services, rights and interests, including in any
group or index of any of the foregoing, in which commodity interests contracts are
presently or in the future dealt in.

Is a present right to receive at a future date a specific quantity of a given commodity for a
fixed price. They are commitments to buy or sell commodities at a specified time and
place in the future.

The object is to realize profits in anticipation of a favorable change in price.

WHAT IS A PRE-NEED PLAN

A pre-need plan is a contract that provides for the performance of future services or the
payment of future monetary considerations at the time of actual need, for which plan
holders pay in cash or installment at stated prices, with or without interest or insurance
coverages and includes life, pension, education, internment, and other plans which SEC
shall approve.

WHAT MEASURES ARE PROVIDED BY THE ACT FOR THE PROTECTION OF

STOCKHOLDERS
The measures provided by the Act for the protection of shareholders are disclosure and
registration of Tender Offers and Proxy Solicitations, Compliance with Reportorial
Requirements by and Regulation of Acts/Transactions of Directors, Officers and
Principal Stockholders,

WHAT ARE TENDER OFFERS

Tender Offers is a public offer to purchase a specified number of shares from

shareholders usually at a premium in an attempt to gain control of the issuing company.
Note that in some instances, the premium is payable only if the offeror is able to obtain
the required number of shares.

It is a public announcement by a company or individual indicating that it will pay a price

above the current market price for the shares “tendered” of a company that it wishes to
acquire or take control of. This is resorted to in an effort to go around the management of
the target company that is resisting a takeover.

WHAT ARE PROXY SOLICITATIONS

Proxy Solicitations is an action to secure the right to vote of so much a number of shares
to ensure the approval of a proposed corporate action/s.

The principal purpose of regulating proxy solicitations by requiring the filing of a proxy
statement is to provide shareholders with appropriate information to permit an intelligent
decision on whether to permit their shares to be voted as solicited for a particular matter
at a forthcoming stockholders meeting.

WHAT IS THE PURPOSE OF REQUIRING/REGULATING TENDER OFFERS AND

PROXY SOLICITATIONS

Since the principal purpose of both devices may be expected to be the same, that of
ACQUISITION and MAINTENANCE of control of an issuer, the Code has required
such to be made subject of disclosure requirements so as to give an investor sufficient
basis to make an informed decision with respect to a tender offer/proxy solicitation.

Moreover, widely held corporations are characteristically directly managed by holders of

only small percentages of the equity securities of such corporations, the employment of
proxies in the conduct of stockholders’ meetings is essential to the conduct of the
corporate activity. However, if proxies were permitted to be sought and obtained without
explanation as to the questions to be voted on and the manner in which shares would be
voted, the stockholders effectively would have no voice in the operation of the
corporation.

WHEN IS A TENDER OFFER DISCLOSURE REQUIRED

A Tender Offer disclosure will be required IF A PERSON (Includes a partnership,

limited partnership, syndicate, corporation or any other group) intends to acquire at least
fifteen percent (15%) OR at least thirty percent (30%) over a period of twelve months
any class of equity security of a listed corporation or any class of equity security of a
corporation with assets of at least 50 million AND having 200 or more stockholders with
at least 100 shares each. (Bar 2002)

WHAT ARE THE PROXY SOLICITATION REQUIREMENTS

The Proxy Solicitation requirements are (a) Must be in writing, signed by the
stockholders or his duly authorized representative and filed with the corporate secretary
before the meeting (b) Unless otherwise provided, it is valid only for the meeting for
which it is intended BUT no proxy shall be valid for more than 5 years (c) No broker or
dealer shall give any proxy, consent or authorization, in respect to any security carried for
the account of a customer, WITHOUT THE EXPRESS WRITTEN CONSENT OF THE
CUSTOMER (d) A broker or dealer who holds or acquires the proxy of at least ten
percent or such percentage as the commission may prescribe of the outstanding share of
the issuer, shall submit a report identifying the beneficial owner within ten days from
acquisition, for its own account or customer, to the issuer, the EXCHANGE where it is
traded, and the SEC

WHAT ARE THE REPORTORIAL REQUIREMENTS IMPOSED ON DIRECTORS,

OFFICERS AND PRINCIPAL STOCKHOLDERS

Every person who is: (a) Directly or indirectly the beneficial owner of more than 10% of
any class of any equity security of a Covered issuer; or (b) A director or an officer of
Issuer of such security SHALL FILE (a) At the time either such requirement is first
satisfied or within ten (10) days after he becomes such beneficial owner, director, or
officer, a statement with SEC, and with Exchange where it may be listed, of the amount
of all equity securities of such issuer of which he is beneficial owner; and (b) Within ten
(10) days after close of each calendar month thereafter, if there has been a change in such
ownership during such month, shall file with SEC, and also in Exchange were listed, a
statement indicating his ownership at the close of calendar month and such changes in his
ownership as have occurred during such calendar month.
WHAT ACTS OR TRANSACTIONS OF DIRECTORS, OFFICERS AND PRINCIPAL
STOCKHOLDERS ARE SUBJECT TO REGULATION

The Use of Information and Sale of Securities are subject to regulation.

HOW IS THE USE OF INFORMATION REGULATED

The Act provides that for the purpose of preventing the unfair use of information which
may have been obtained by such beneficial owner, director, or officer by reason of his
relationship to the issuer, that any profit realized by him from any purchase and sale, or
any sale and purchase, of any equity security of such Issuer, within any period of less
than six (6) months UNLESS such security was acquired in good faith in connection with
a debt previously contracted SHALL inure to and be recoverable by the Issuer,
irrespective of any intention of holding the security purchased or of not repurchasing the
security sold for a period exceeding six (6) months.

HOW IS THE PROFIT RECOVERED

It may be recovered by suit instituted before the RTC by Issuer, or by owner of any
security of Issuer in the name and in behalf of Issuer if Issuer shall fail or refuse to bring
such suit within sixty (60) days after request or shall fail diligently to prosecute the same
thereafter, but no such suit shall be brought more than two (2) years after the date such
profit was realized.

HOW IS THE SALE OF SECURITIES REGULATED

The Act provides that it shall be unlawful for any such beneficial owner, director, or
officer, directly or indirectly, to sell any equity security of such issuer if person selling
security or his principal does not own the security sold OR if owning the security, does
not deliver it against such sale within twenty (20) days thereafter, or does not within five
(5) days after such sale deposit it in the mail or other usual channels of transportation
BUT: No person shall be deemed to have violated the provision if he proves that
notwithstanding the exercise of good faith he was unable to make such delivery or
deposit within such time, or that to do so would cause undue inconvenience or expense.

PROHIBITION DOES NOT APPLY: To a dealer in the ordinary course of his business
and incident to the establishment or maintenance by him of a primary or secondary
market, otherwise than on an Exchange, for such security.
WHAT CONSTITUTES MANIPULATION OF SECURITY PRICES

The manipulation of security prices are devices and practices that are considered
unlawful for any person acting for himself or through a dealer or broker, directly or
indirectly to do. They are (a) To create a false or misleading appearance of active trading
in any listed security traded in an Exchange or any other trading market (b) By effecting
any transaction in such security which involves no change in the beneficial ownership
thereof (c) By entering an order or orders for the purchase or sale of such security with
the knowledge that a simultaneous order or orders of substantially the same size, time and
price, for the sale or purchase of any such security, has or will be entered by or for the
same or different parties; or (d) By performing similar act where there is no change in
beneficial ownership (e) To effect, alone or with others, a series of transactions in
securities that: (i) Raises their price to induce the purchase of a security, whether of the
same or a different class of the same issuer security, whether of the same or a different
controlled company by others; (ii) Depresses their price to induce the sale of a security,
whether of the same or a different class, of the same issuer or of a controlling, controlled,
or commonly controlled company by others; or (iii) Creates active trading to induce such
a purchase or sale through manipulative devices such as marking the close, painting the
tape, squeezing the float, hype and dump, boiler room operations and such other similar
devices (f) To circulate or disseminate information that the price of any security listed in
an Exchange will or is likely to rise or fall because of manipulative market operations of
any one or more persons conducted for the purpose of raising or depressing the price of
the security for the purpose of inducing the purchase or sale of such security (g) To make
false or misleading statement with respect to any material fact, which he knew or had
reasonable ground to believe was so false or misleading, for the purpose of inducing the
purchase or sale of any security listed or traded in an Exchange (h) 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.

WHY IS THE MANIPULATION OF SECURITY PRICES PROHIBITED

Manipulation is an artificial control of security prices; it is an attempt to force securities

to sell at prices either above or below those which would exist as a result of the normal
operations of supply and demand. The manipulator hopes to profit by creating fictitious
prices at the expense of the general trading public.

WHAT ARE EXAMPLES OF MANIPULATIVE DEVICES

The following are devices for the manipulation of security prices:

Wash Sales – “Wash Sales” is defined as a fictitious kind of sale, disallowed on stock and
other exchanges, in which a broker who has received orders from one person to buy and
from another person to sell a particular amount of quantity of some particular stock or
commodity simply transfers the stock or commodity from one principal to the other and
pockets the difference, instead of executing both orders separately to the best advantage
in each case, as is required by the rules of the different exchanges. It may also be defined
as “purchase or sale of securities which would involve no change of ownership.”

Matched Orders – It consists in entering an order to buy or sell with knowledge that a
corresponding order to sell or buy the same security at substantially the same price and
time will be made by another party.

Market “rigging” or “jiggling” by pools or individuals – That acts prohibited are effecting
a series of transactions which have one of the following results: (a) creating actual or
apparent activity, or (b) raising or depressing prices. Any series of transactions producing
any of these results will be illegal, if made for the purpose of inducing purchases of sales
by others.

Dissemination of information or market activity – Brokers and dealers and other person
are forbidden to induce the purchase or sale of a security which is likely to rise or fall
because of market operations conducted for an advance or decline. Such information
cannot be disseminated even if they are true. But such dissemination is prohibited only if
made “in the ordinary course of business.” This includes False and misleading statements
– The general principle to be observed is that the statements must be frank, honest and
truthful, not only literally but also in the impression it makes on the customer. A
statement may be literally true, but if it is misleading, it is unlawful.

Short sale – A “short sale” is a contract for sale of shares of stock which seller does not
own, or certificates for which are not within his control, so as to be available for delivery
at the time when, under the rules of exchange, delivery must be made. There is a short
sale when the seller does not own or control the securities he is selling, and therefore,
cannot himself supply the securities for delivery. “Short sale” is usually applied to sales
of stocks and bonds where the seller has not the stocks he assumes to sell, but borrows it
and expects to replace it when the market value has declined. Such sales are perfectly
valid, provided the parties contemplate an actual purchase or actual sale by or through the
broker and not a mere settlement by payment of differences.

Stop-loss Order – A “stop order” is a direction by a purchaser to his broker to sell the
stock purchased at the best available prices if it should touch the price named in the order,
while it is being held by the broker; but is does not impose an obligation on the broker to
hold it until is reaches that price, as it is measure of protection which the purchaser
provides for himself against loss beyond a certain point in a fluctuating market. The
meaning of a “stop order” given to broker is to await a certain figure, and, whenever this
figure is reached, to stop the transaction by then selling or buying, as the case maybe, as
well as possible. An instance given by a witness was: “If you give stop order at 109 or
110, you must sell as soon as the stock or bonds have sold at that price by someone else.
If you can sell at that price, you must do it; but, if you cannot, you must sell at whatever
the price is after they have sold at that price.”

Corner – “Corner” is an abbreviation of the expression “cornering the shorts.” A corner is

a speculative situation in which the ownership of outstanding shares becomes so
concentrated that short sellers are unable to secure stock except from this owner group. It
grows out of a price rise in stock, whether natural or manipulated. As rise in stock,
whether natural or manipulated. As the stock rises in value, it is short sold by speculators
who feel that it is too high and is certain to decline. They borrow the stock to short sell; it
is often loaned by the controlling group. Eventually, they attempt to cover by buying back
the stock which they have short sold. Since the controlling group is the only one which
has any stock to sell, the short sellers are forced to settle with then at whatever price the
group dictates. At this point, the short sellers are “cornered.”

Option Trading- The idea is that certain firms will issue options good for a certain limited
time in a certain stock for a certain sum. If the option becomes valuable through market
changes during the option’s life, then the holder cashes in on his ticket. If the option does
not become valuable, then the holder does nothing. He is simply through with the
transaction, being out only the price he paid for the option in the beginning. It includes
puts, calls, straddles or privileges.

The Types of Options are (a) Put – A “put” is an agreement through which the maker
contracts to receive, if the holder wishes him to, a certain amount of a certain stock at a
certain price within a certain, in consideration of a price, or fee, from the option holder. It
is a contract by which one of the parties thereto purchases at a fixed sum the privilege to
deliver certain stock within a definite period of time. (b) Call – A “call” is an agreement
whereby the maker contract to deliver, if the holder of the call wishes him to, a certain
amount of a certain stock at a certain price within a certain time, the maker receiving in
consideration for his contract a certain fee or price from the option holder. The call,
therefore, is just the reverse of the Put. It is used if the holder expects an advance instead
of a decline in any stock. It has also been defined as the option or right to demand a
certain amount of securities at a fixed price at or within certain time agreed on (c)
Straddle – The term means the double privilege of a “put” and a “call,” and secures to the
holder the right to demand of the seller at a certain price within a certain time a certain
number of shares of specified stock, or to require him to take, at the same price within the
same time, the same shares of stocks. It has been described as a combination of the put
and call, involving both of those contracts at the same price. A straddle binds the maker
to accept a certain amount of a certain stock at a certain price within a certain time, at the
option of the holder and at the same time binds the maker also to deliver the same amount
of the same stock at the same price within the same time also at the option of the holder,
for a stated consideration. In other words, the holder may, during the life of the straddle,
either receive from or deliver to the maker of the stock at the price named. He may do
either one, or he may do both. If the stock goes consistently down, he will elect to deliver
the stock. If it goes consistently up, he will elect to receive the stock at the price named
(d) Privilege – The price charged by the maker for straddles and spreads is generally at
least double that for either puts or calls, since the former are doubly valuable. The option
price of the straddle is always the same for both the put and the call side and is usually
the approximate market price at the time of purchase. The difference between the straddle
and the spread is simply that the price of the call and the price of the put differ in the
spread, instead of being the same as in straddle.

WHAT ARE EXAMPLES OF PROHIBITED CONDUCT

Examples of prohibited conduct are:

Painting the Tape- Engaging in a series of transactions in securities that are reported
publicly to give the impression of activity of price movement in a security
Marking the Close- Buying and selling securities at the close of the market in an effort to
alter the closing price of the security

Improper Matched Order-Engaging in transactions where both the buy and sell orders are
entered at the same time and the same price and quantity by different but colluding
parties

Hype and Dump- Engaging in buying activity at increasingly higher prices and then
selling securities in the market at higher prices

Squeezing the Float- Taking advantage of a shortage of securities in the market by

controlling the demand and exploiting market congestion during such shortages in a way
as to create artificial prices

WHAT CONSTITUTES FRAUDULENT TRANSACTIONS

Fraudulent Transactions refer to the unlawful acts of any person, directly or indirectly, in
connection with the purchase or sale of any securities to: (a)Employ any device, scheme,
or artifice to defraud (b)Obtain money or property by means of any untrue statement of a
material fact of any omission to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made, not
misleading (c)Engage in any act, transaction, practice or course of business which
operates or would operate as a fraud or deceit upon any person.

WHAT IS AN INSIDER

An “Insider” shall include: (a) the Issuer (b) a director or officer of, or a person
controlling, controlled by, or under common control with Issuer (c)a person whose
relationship or former relationship to Issuer gives or gave him access to a fact of
special significance about Issuer or the security that is not generally available (d)
a government employee, or directors, or officer of an exchange, clearing agency
and/or SRO who has access to material information about an Issuer or a security
that is not generally available to the public (e) a person who learns such a fact
from any of the foregoing insiders with knowledge that the person from whom he
learns the fact is an insider.

WHAT CONSTITUTES INSIDER TRADING

Insider Trading occurs when an insider sells or buys a security of the issuer, while in
possession of material information with respect to the issuer or the security that is not
generally available to the public, unless: (a) the insider proves that the information was
not gained from such relationship; or (b) If the other party selling to or buying from the
insider (or his agent) is identified, the insider proves: (i) that he disclosed the information
to the other party, or (ii) that he had reason to believe that the other party otherwise is
also in possession of the information.

A purchase or sale of a security of the issuer make by an insider defined in Subsection

3.8, or such insider’s spouse or relatives by affinity or consanguinity within the second
degree, legitimate or common-law, shall be presumed to have been effected while in
possession of material non-public information if transacted after such information came
into existence but prior to dissemination of such information to the public and the lapse
of a reasonable time for the market to absorb such information: Provided, however, That
this presumption shall be rebutted upon a showing by the purchaser or seller that he was
not aware of the material non-public information at the time of the purchase or sale.

WHAT IS MATERIAL NON-PUBLIC INFORMATION

Information is considered “material non-public” if: (a) It has not been generally disclosed
to the public and would likely affect the market price of the security after being
disseminated to the public and the lapse of a reasonable time for the market to absorb the
information; or (b) would be considered by a reasonable person important under the
circumstances in determining his course of action whether to buy, sell or hold a security.