Pawnshop Registration Philippines: Requirements and Rules Under the SRC

Pawnshop registration in the Philippines is not a single filing. A pawnshop must be properly registered as a business, and any investment-taking activity connected to it must comply with the registration and licensing requirements of the Securities Regulation Code (SRC). Under Section 8.1 of the SRC, securities cannot be sold or offered for sale or distribution in the Philippines without a registration statement duly filed with and approved by the Securities and Exchange Commission (SEC). Before such sale, information on the securities must be made available to each prospective purchaser.

The SEC has enforced this rule against unregistered pawnshop operations. In one case, the Commission issued a Cease and Desist Order against an entity doing business as a pawnshop that was soliciting investments from the public without the required registration and permit to sell securities.

What the SEC requires before a pawnshop can offer securities

A pawnshop that only accepts pledges and extends loans against collateral operates as a lending business. But once it solicits money from the public and promises returns, it may be selling securities in the form of investment contracts.

Under Section 3.1 of the SRC, securities include shares, participation, or interests in a corporation or commercial enterprise, as well as investment contracts and evidences of indebtedness. Rule 26.3.5 of the 2015 Implementing Rules and Regulations of the SRC defines an investment contract as a contract, transaction, or scheme where a person invests money in a common enterprise and expects profits primarily from the efforts of others.

For a pawnshop, this means that any scheme where the public puts in money and waits for a promised payout may be treated as an offer of securities. If so, the operator must file a registration statement and obtain a permit to offer or sell securities from the SEC.

The Howey Test and how the SEC applies it

Philippine jurisprudence adopted the Howey Test from United States law. Under this test, a transaction is an investment contract when there is (1) an investment of money, (2) in a common enterprise, (3) with expectation of profits, (4) derived primarily from the efforts of others.

The SEC applied this test in the Platinum Coin case. The Commission found that the entity solicited investments from the public, pooled the money to fund its lending operations, promised guaranteed returns ranging from fifteen percent (15%) to fifty percent (50%) within thirty (30) days, and relied on its own efforts and those of its agents to generate profits. All four elements were present, so the SEC held that the operation involved unregistered securities.

Post-dated checks can also be securities

A pawnshop or lending operation may issue post-dated checks to investors as security for their money. The SEC has ruled that these checks can themselves be securities in the form of evidences of indebtedness.

In the Platinum Coin ruling, the Commission held that post-dated checks issued in exchange for investments solicited from the public assume the character of evidence of indebtedness under the SRC. They are not ordinary commercial checks. They become securities because they were issued in lieu of shares or interests in the business, and the investors expected profits from the operation.

What happens if a pawnshop operates without SEC registration

The SEC can issue a Cease and Desist Order under Section 64.1 of the SRC without a prior hearing if it finds that the act or practice will operate as a fraud on investors or is likely to cause grave or irreparable injury or prejudice to the investing public.

In the Platinum Coin case, the SEC ordered the entity and its owner to immediately cease and desist from selling or offering securities until the required registration statements were filed and approved. The order also prohibited them from transacting any business involving funds in their depository banks and from transferring or disposing of assets. The SEC directed its Enforcement and Investor Protection Department to initiate administrative proceedings and impose appropriate penalties.

The Commission also warned that persons acting as solicitors, agents, or information providers for such unregistered schemes may face administrative and criminal action.

Practical steps for pawnshop registration

1. Register the business entity with the appropriate agency. A corporation or partnership must register with the SEC. A sole proprietorship registers with the Department of Trade and Industry.
2. Secure a business permit from the local government unit where the pawnshop will operate.
3. Determine whether the pawnshop will solicit investments from the public. If it will, the operator must file a registration statement with the SEC and obtain a permit to offer or sell securities under Section 8.1 of the SRC.
4. Avoid issuing post-dated checks or similar instruments to investors unless the securities registration requirements are complied with. The SEC treats these as securities when issued in exchange for public investments.
5. Consult a lawyer before launching any investment-taking activity connected to the pawnshop.

Frequently asked questions

Is a pawnshop required to register with the SEC? A pawnshop that operates as a corporation or partnership must register with the SEC. If it also offers securities to the public, it must file a registration statement and obtain a permit to sell securities under Section 8.1 of the SRC.

Can a pawnshop accept investments from the public? Only if it complies with the SRC registration and licensing requirements. Soliciting investments without SEC approval can lead to a Cease and Desist Order and administrative or criminal liability.

What is an investment contract under Philippine law? Under Rule 26.3.5 of the 2015 SRC IRR, an investment contract is a contract, transaction, or scheme where a person invests money in a common enterprise and expects profits primarily from the efforts of others.

Practical takeaways

• A pawnshop must be registered as a business, and any public investment-taking activity requires SEC registration and a permit to sell securities.
• The SRC defines securities broadly to include investment contracts and evidences of indebtedness.
• Post-dated checks issued to investors can be considered securities under Philippine law.
• The SEC can issue a Cease and Desist Order without a prior hearing to protect the investing public.
• Operating an unregistered investment scheme can result in administrative and criminal liability.

Primary sources

The rules discussed above are drawn from the following primary sources. Where the firm's library holds the document as a PDF it is embedded here in full; the rest are cited by title.

PLATINUM COIN / PLATINUM COIN PAWNSHOPOpen in Law LibraryDownload PDF

• BANGKO SENTRAL NG PILIPINAS, June 27, 2017

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.