Financially savvy advisers always say never to depend on a single source of income, and to invest whenever possible so that a second, third, and so on, streams of income are created. In this day and age where get-rich-quick schemes and high-yield investments sometimes promise returns that are too good to be true, it is a wise idea to brush up on legal requirements in order for one to protect his/her investment.
“Investment” is a broad term that can loosely be used to refer to any allocation of money, assets, or effort into a venture or activity that is expected to result in a monetary gain, usually in the form of future pay-outs, for the investor. An investment contract, on the other hand, is a legal instrument between one party who invests money (investor) in a person, business, or activity for the purpose of receiving a return on such investment.
For the more sophisticated investor, the issue of investments has to do with the regulatory purview of the Securities and Exchange Commission (SEC) particularly under Republic Act 8799, more popularly known as the Securities Regulation Code (SRC).
The SRC characterizes investment contracts as securities. “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 (Sec. 3, SRC).
An investment contract typically has the following elements:
- A contract, transaction or scheme
- An investment of money
- Investment is made in a common enterprise
- Expectation of profits
- Profits arise primarily from the efforts of others
When faced with an investment opportunity falling under the classification of an investment contract, the importance of a duly approved registration statement with the SEC cannot be overemphasized. In assessing the registration statement, the SEC is provided an opportunity to check whether the insolvent has been judicially declared insolvent, has violated the SRC, has been or is engaged or is about to engage in fraudulent transactions, or has made any false or misleading representation of material facts in any prospectus concerning the issuer or its securities, or failed to comply with any requirements of the SEC (Sec. 13, SRC).
In one case, the SEC issued a cease and desist order against a corporation whose business model requires an investor to become a Business Center Owner (BCO), or one who is enrolled in the company’s referral program and who will ultimately purchase real property from any accredited real estate developers (Power Homes Unlimited Corporation vs SEC (G.R. 164182, 26 February 2008).
The SEC found that the petitioner, “as a marketing company that promotes and facilitates sales of real properties and other related products of real estate developers through effective leverage marketing,” was engaged in the sale or offer for sale or distribution of investment contracts, which are considered securities under Sec. 3.1 (b) of the SRC, but failed to register them in violation of Sec. 8.1 of the same Act.
The Supreme Court ruled that the petitioner’s business constitutes an investment contract that should be registered with public respondent SEC before its sale or offer for sale or distribution to the public. The investment scheme had all the elements of an investment contract within the purview of the SRC. The investors recruited by members of the respondent corporation pool their resources together by paying enrollment fees to the corporation. Petitioner receives a portion of these fees while its members are responsible for the recruitment of investors, whereby the investors’ uplines receive a portion of the payment/enrollment fees as his/her profit. In other words, the expectation of profits was derived primarily from the efforts of others.
As the world-renowned investor Warren Buffet as said, “risk comes from not knowing what you are doing.” When dealing with investment opportunities, due diligence, risk management and compliance with legal requirements are basic foundations in order that an investment does not turn into a disappointment.
First published on The Daily Tribune.
