sec_commission_decision SP Case No. 08-17-001 In Re: Rappler, Inc. and Rappler Holdings CorporationsSP Case No. 08-17-001 In Re: Rappler, Inc. and Rappler Holdings Corporations

SP Case No. 08-17-001 In Re: Rappler, Inc. and Rappler Holdings Corporations

Republic of the Philippines

Department of Finance Securities and Exchange Commission PICC Secretariat Building, PICC Complex, Pasay City

COMMISSION EN BANC

IN RE: RAPPLER, INC. AND RAPPLER HOLDINGS CORPORATION

DECISION

findings of the Special Panel1 in its Investigation Report in toto. After due consideration, the En Banc hereby approves and adopts the

under which a Special Panel was created, viz: On 8 July 2017, this En Banc issued SEC Resolution 437, Series of 2017,

the Commission's mandate. (Emphasis supplied) examination of Rappler, Inc. and its parent, Rappler Mass Media entities, in relation to the Anti-Dummy Law as well as possible violations of the Corporation Code the Securities Regulation Code, and other laws within [F]or purposes_of conducting_a formal, in-depth Holdings Corporation, as to possible violations of nationality restrictions on ownership and/or control of

2017 as Foreign Equity Restrictions in Mass Media, enshrined in Article XVI, Section 11(1) of Constitution (in relation to Article II, Section 19 thereof) and enforceable through: The governing laws were specified in the Show Cause Order dated 1 August

Section 2 of Presidential Decree 1018, Limiting the Ownership and Management of Mass Media to Citizens of the Philippines (in relation to the sanctions amended, and Section 5.1(f) of the Securities Regulation Code); under Section 6(i) of Presidential Decree 902-A, as

Section 1 of Commonwealth Act 108, aka The Anti Dummy Act (in relation to the sanctions under Section Section 5.1(f) of the Securities Regulation Code); and 6(i) of Presidential Decree 902-A, as amended, and

Section 7 in relation to Section 14 of Republic Act 7042, The Foreign Investments Act of 1991, as amended.

Code, the Securities Regulation Code, and other laws within the Commission's mandate, arising from the same act. This enumeration is without prejudice to any violation of the Corporation

1 Authorized under SEC Resolution 437, Series of 2017 dated 8 July 2017

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 2 of 29

FACTS

THE RESPONDENTS

Its primary purpose is "to design, develop, establish, market, sell, maintain, support, distribute, customize, sell, re-sell and/or operate news, information and social network services including but not limited to contents, platforms, systems and/or applications Rappler, Inc. is a domestic stock corporation registered2 on 25 July 2011. via web. internet, mobile. and other delivery formats:

brand affinity and other related services and packages provided it will not act as an internet service provider." (Emphasis supplied) communications, advertising, corporate social responsibility, marketing, PR, events,

on 12 December 2014. It presently owns 98.84% of Rappler, Inc.4 Rappler Holdings Corporation is a domestic stock corporation registered3

PDR ISSUANCES IN 2015

negotiating with Omidyar Network regarding funding.5 On 29 October 2013, Rappler, Inc. (through its President) started

negotiating with North Base Media regarding funding.6 On 26 January 2014, Rappler, Inc. (through its President) started

Philippine Depositary Receipts ("PDRs") covering shares of Rappler, Inc., designated as "NBM PDRs" because they were sold to NBM Rappler L.P., a foreign juridical entity.8 NBM Rappler L.P. was founded and co-owned by North Base Media Ltd.,9 a foreign juridical entity. On 25 May 2015,7 Rappler Holdings Corporation issued 12,028,718

to use the word "Rappler" in the name of NBM Rappler, L.P.1 Rappler. Inc. is not listed as a partner of NBM Rappler, Ltd.11 Allegedly, NBM Rappler, Ltd. merely secured the permission of Rappler, Inc.

entered into a partnership with North Base Media, Ltd. On 31 May 2015, Rappler Holdings Corporation publicly reported12 that it

2 SEC Registration No. CS201112835. 4 As reported in 2016 Annual Financial Statements of Rappler, Inc. 6 Page 8 of Verified Explanation filed on 29 August 2017. 7 As reported in Rappler Holdings Corporation's Consolidated Financial Statements for 2015 and 8 Registered as a Limited Partnership in the Cayman Islands. See Annex 5 of Verified % Registered as a Limited Company in the Cayman Islands. See Annex 5 of Verified Compliance NBM Rappler L.P. showing five (5) foreign juridical entities as partners in the Limited Partnership) including North Base Media, Ltd. but excluding Rappler, Inc. There are no Filipino partners, natural 5 Page 15 of Verified Explanation filed on 29 August 2017 Compliance filed 12 October 2017 - Affidavit of Stuart Karle, Partner and General Partner of North Base Media, Ltd., executed in New York, NY, USA and dated 29 August 2017. filed 12 October 2017 - Affidavit of Stuart Karle, Partner and General Partner of North Base Media, Ltd., executed in New York, NY, USA and dated 29 August 2017. 10 Annex 5 of Verified Compliance filed 12 October 2017 - Affidavit of Stuart Karle, Partner and General Partner of North Base Media, Ltd., executed in New York, NY, USA and dated 29 August 2017 11 Annex 4 of Verified Compliance filed 12 October 2017 - Register of Partnership Interests of or juridical. 2016. 3 SEC Registration No. CS201424077.

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covering shares of Rappler, Inc., designated as "ON PDRs" because they were sold to Omidyar Network Fund LLC, a foreign juridical entity.14 On 2 October 2015,13 Rappler Holdings Corporation issued 7,217,257 PDRs

that it received an investment from Omidyar Network LLC. On 5 November 2015, Rappler Holdings Corporation publicly reported15

August 2015; and 1 December 2015. In these filings, it represented that: of/Application for Confirmation Exempt Transactions) thrice: 8 June 2015; 8 In 2015, Rappler Holdings Corporation filed SEC Form 10-1 (Notice

(a) 264, 601 PDRs were issued on 29 May 2015 to NBM Rappler, L.P.; (b) 11,764,117 PDRs were issued on 29 July 2015 to NBM Rappler, L.P.; (c) 7,217,257 PDRs were issued to Omidyar Network Fund LLC.

INTERNAL INVESTIGATION IN 2017

investigation into Rappler, Inc. and Rappler Holdings Corporation "for any possible contravention of the strict requirements of the 1987 Constitution," with regard to the issuances of Philippine Depositary Receipts (PDRs) to NBM Rappler, L.P. and 14 December 2016 from the Office of the Solicitor General (0SG) requesting an Omidyar Network Fund LLC in 2015. On 22 December 2016, the Commission En Banc received a Letter16 dated

the Commission's Company Registration and Monitoring Department (CRMD). (collectively "Rappler") appeared in response to a Notice of Conference called by Rappler then furnished a copy of the ON PDRs. On 28 February 2017, Rappler Holdings Corporation and Rappler, Inc.

this would require an in-depth look at the corporate layering of Rappler and RHC, as well as the amount of the investments and the PDRs themselves, which are currently not disclosed to the public, Rappler not being a publicly-listed company. That being said, the OSG still feels it proper to call your attention to such situation, in order that your office may investigate the relevant companies for any Republic of the Philippines, it is our office's sworn duty to uphold the Constitution and to defend it from any entity which seeks to subvert its mandates. We therefore hope for your kind cooperation on the matter." [Excerpt from OSG Letter to the SEC Chair Teresita Herbosa dated 14 December 31 May 2015 (last accessed 31 July 2017). 14 Registered as a Limited Liability Company (LLC) in the state of Delaware, USA. See Annex 6 of Verified Compliance dated 12 October 2017 - Authentication of Harriet Smith Windsor, I5 "Omidyar Network Invests in Rappler" published on http://www.rappler.com on 5 November 2015 (last accessed 31 July 2017). Rappler, Inc. (Rappler), a media corporation, has been on the receiving end of funds from foreign investors. In 2015, Rappler received 'an undisclosed amount from Omidyar Network, a fund created by eBay founder and entrepreneur Pierre Omidyar and his wife.' It has also entered into a "partnership"with North Base Media, an investment firm based in Washington, D.C., likewise for an undisclosed amount. xxx The investment agreements involve what are currently known as Philippine Depositary Receipts (PDRs). These are derivative securities under the Securities Regulation Code (SRC) xxx Admittedly, there is no certainty as to whether Rappler's PDR arrangement with Omidyar Network and North Base Media runs afoul of the Constitutional prescription on foreign ownership, as possible contravention of the strict requirements of the 1987 Constitution xxx As the counsel for the 2011 12 "Top Journalists' Investment Fund Invests in Rappler" published on http://www.rappler.com on 13 As reported in Rappler Holdings Corporation's Consolidated Financial Statements for 2015 and Secretary of State of the State of Delaware, executed in Wilmington, DE, USA. 16 "It has recently been brought to the attention of the Office of the Solicitor General (OSG) that 2011

IN RE:RAPPLER,INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 4 of 29

approval of the ON PDR Holders on corporate matters, viz: The ON PDRs contain a provision wherein the "company" is required to seek

12.2 The Issuer undertakes to cause the Company from the date hereof and while the ON PDRs are outstanding: xxx

12.2.2 not to, without prior good faith_discussion with ON PDR Holders and without the approval of issued and outstanding PDRs, alter, PDR Holders holding at least two thirds (2/3s) of all otherwise change the Company Articles modify or of

where such alteration, modification, change Incorporation or By-Laws or take any other action action will prejudice the rights in relation to the ON PDRs; xxx (Emphasis supplied) or

the term "Issuer," viz: On Page 1 of the ON PDR, the term "Company" is clearly distinguished from

by virtue of the laws of the Republic of the Philippines Instrument") is executed this [2 October 2015] by RAPPLER HOLDINGS CORPORATION (the "Issuer" or PDR Holders" of the Philippine Depositary Receipts (the "ON PDRs") to be issued by RHC. This PHILIPPINE DEPOSITARY INSTRUMENT (the "PDR "RHC"), a corporation duly organized existing under and xxx in favor of the holders for the time being (the "ON

WITNESS: That

WHEREAS:

(A)The issuer is a shareholder in Rappler, Inc. (the "Company").

XXX XXX XXX

I. In this this Instrument, the words and following meanings: xxx Definitions expressions set out below shall have the

"Company" means Rappler, Inc.

Rappler Holdings Corporation, but also on the Company which issued the that legal and economic rights granted to the ON PDR Holders can be traced back to the legal and economic rights originally reserved to the shareholders. underlying shares, Rappler, Inc. The ON PDR instrument may be categorized as an equity derivative, since its value is dependent on the underlying equity. It follows Thus, the ON PDR imposes obligations not just on the Issuer of the derivative,

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Instrument covering 264,601 PDRs dated 29 May 2015 issued to NBM Rappler, L.P. This instrument did not contain a similar provision to that of the ON PDRs. At the same conference, Rappler also produced a copy of another PDR

to the 11,764,117 PDRs issued to NBM Rappler, L.P. on 29 July 2015. The CRMD was not given a copy of any other PDR Instrument corresponding

Rappler, Inc. and Rappler Holdings Corporation's corporate structure, as far as can be gleaned from their mandatory filings with the Commission, and later the terms and conditions of the actual PDRs issued by the respondents. power, the Commission undertook an internal, inter-departmental investigation into From December 2016 to July 2017, pursuant to its broad regulatory

FORMAL INVESTIGATION / SPECIAL PANEL

Resolution 437, Series of 2017, to conduct a formal investigation. On 8 July 2017, the Special Panel was created by the En Banc through SEC

Respondents received the Show Cause Order on the same day. the respondents to file a sworn statement/explanation within fifteen (15) days. On 1 August 2017, the Special Panel issued a Show Cause Order, directing

Holdings Corporation, filed a Request for Extension, due to a personal emergency. On 17 August 2017, the President-in-common of Rappler, Inc. and Rappler

for extension, for a non-extendible period of five (5) days. Respondents received the Order on the following day, 24 August 2017. On 23 August 2017, the Special Panel issued an Order granting the request

On 29 August 2017, the respondents filed their Verified Explanation.

Production of Documents, within fifteen (15) days, to wit: On 27 September 2017, the Special Panel issued an Order for the

1. A certified true copy of the Philippine Depositary Receipt Instrument17 covering 11,764,117 PDRs issued on 29 July 2015 to NBM Rappler, L.P.

2. The registration/organization/incorporation documents of the following foreign entities: (a) North Base Media, Ltd. (b) NBM Rappler, L.P. (c) Omidyar Network Fund LLC

following day, 28 September 2017. Respondents received the Order for the Production of Documents on the

they attached the following annexes: On 12 October 2017, respondents filed their Verified Compliance, to which

17 Footnote in the Order for the Production of Documents stated that: "It is evident from the Financial Statements and Notices of Exemption on file with this Commission that Rappler Holdings issued on 29 May 2015, out of the total 12,028,718 PDRs issued to NBM Rappler, L.P. Corporation issued Philippine Depositary Receipts (PDRs) to NBM Rappler, L.P. on two separate occasions, but the respondents have only submitted one instrument which covers the 264,601 PDRs

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11,764,117 PDRs issued on 29 July 2015 to NBM Rappler, L.P., but not a full-text PDR Instrument Allegedly, respondent Rappler Holdings Corporation issued the remaining NBM PDRs under the exact same terms as the 264,601 PDRs issued on 29 May 2015 Annex 1 - a certified PDR Certificate covering

Annex 2 - a copy of the Certificate of Registration of Islands to NBM Rappler, L.P. Exempted Limited Partnership, issued in the Cayman

Annex 3 - a copy of the Certificate of Good Standing of Partnership, issued in the Caymans Islands to NBM Rappler, L.P.

Interests, issued in the Cayman Islands to NBM Annex 4 - a copy of the Register of Partnership Rappler, L.P.

Annex 5 - a copy of the notarized Affidavit of Stuart Karle, Partner and General Counsel of North Base Media, Ltd. executed in New York, NY, USA, stating that: Base Media, Ltd. and Rappler, Inc., a Philippine "NBM Rappler, L.P. is not a partnership between North corporation. NBM Rappler, L.P. does not have any Filipino partners or investors."

issued in Wilmington, Delaware, USA to Omidyar Network Fund, LLC. Annex 6 - a copy of the Certificate of Formation

Amendment, issued in Wilmington, Delaware, USA to Omidyar Network Fund, LLC. Annex T CertificateofChange of Agent

In Paragraph 3 of their Verified Compliance, respondents stated that:

XXx RAPPLER and RHC respectfully notify this Honorable Special Panel that their stockholders were aware of the reputations of North Base Media, Ltd./ NBM Rappler, L.P. and Omidyar Network/ Omidyar Network Fund LLC and did not see the need to do due diligence of these entities xxx (Emphasis supplied)

December 2017, more than four (4) months since the start of Formal Investigation. Compliance, to which was attached a photocopy of a purported Waiver of Paragraph 12.2.2 of the ON PDR. The document is a private one, not subscribed before a Notary or a Philippine Consulate. It was executed as recently as 11 On 22 December 2017, respondents filed a Supplemental Verified

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DISCUSSION

GOVERNING LAWS AND RULES

Constitution provides that: The Foreign Equity Restriction in Article XVI, Section 11(1) of the

be limited to citizens of the Philippines, or to "The ownership and management of mass media shall owned and managed by such citizens. xxx" corporations, cooperatives or associations, wholly-

Management of Mass Media to Citizens of the Philippines (in relation to the Section 5.1(f) of the Securities Regulation Code), similarly provides that: sanctions under Section 6(i) of Presidential Decree 902-A, as amended, and Section 2 of Presidential Decree 1018, Limiting the 0wnership and

"The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations or associations wholly owned and managed by such citizens."

evidently to adapt to changing times and to new technologies that may arise after legislature and to administrative agencies. Today's legislature considers internet or followed the lead of the legislature and considers internet or online media as Mass Media and subject to the Foreign Equity Restrictions of the Constitution. 1987. Precisely to adapt to changing times, wide discretion has been given to the online media a type of Mass Media. The Commission, an administrative agency, has The term "Mass Media" was not further defined in the Constitution itself.

the masses and that tends to set the standards, ideals and aims of the masses, the distinctive feature of which is the dissemination of information and ideas to the public, or a portion thereof.18 The citizenship requirement is intended to prevent the use of such facilities by aliens to influence public opinion to the detriment of the best interests of the nation.19 "Mass Media" refers to any medium of communication designed to reach

includes electronic media including the internet, viz: of Mass Media found in the Tobacco Regulation Act of 2003, which notably For some years now, the Commission has recognized the statutory definition

For this purposes, mass media includes print media such as, but not limited to, newspapers, magazines, and to, radio, television, cable television, and cinema; electronic media such as but not limited to the internet.20 "Mass communication designed to reach a mass of people. publications; broadcast media such as, but not limited Media" - refers toany.medium of

19 Ministry of Justice Opinion No. 24, Series of 1986. 20 Section 4(f) of R.A. 9211, Tobacco Regulation Act of 2003. 18 Department of Justice Opinion No. 40, Series of 1998.

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Indeed, recent opinions on Mass Media specifically cite this definition, viz:

digital communication technology, i.e. internet and With the continuing evolution and proliferation of mobile technology, individuals are now exposed to information that was previously restricted to a select

technology have become recognized platforms for Regulation Act of 2003 specifically includes the group, making them susceptible to the influence of modern mass media techniques such as advertising and propaganda. Thus, the internet and mobile mass media. In our jurisdiction, the Tobacco internet in the definition of mass media.21

transmission of information to the masses through "any medium of communication," which includes technologies that were not present at the time22 foreigners from wielding influence over the minds of the Filipino people. the Constitution was drafted (e.g. Internet, Mobile Technology. and Social Media) but are nonetheless embraced by the spirit and intent of the law, which is to prevent What matters to the Commission in determining what is "mass media" is the

must be related to the broader state policy in Article II, Section 19 of the Constitution which declares that: The constitutional and statutory Foreign Equity Restrictions in Mass Media

"The State shall develop a self-reliant and independent national economy effectively controlled by Filipinos."

Commission to "prepare, approve, amend or repeal rules, regulations and orders. and issue opinions and provide guidance on and supervise compliance with such rules, regulations and orders." Section 5 of the Securities Regulation Code expressly empowers the

Regulations of the Securities Regulation Code defines "Control" as "the power to its activities." The Commission's definition is intentionally broad and does not equate "control" with either ownership of shares of stock or with management as determine the financial and operating policies of an entity in order to benefit from director or officer.24 In this regard, Rule 3.1.823 of the 2015 Implementing Rules and

of the Securities Regulation Code, as well as all succeeding IRRs up to the present. or cause the direction of the management and policies of a person, whether through the ownership of the Internet and Mobile Technology; Advertising; Mass Media. Explanation filed on 29 August 2017, there were only two types, print and broadcast. However, 23 Same language as SRC Rule 3(1)(E) of the 2004 Amended Implementing Rules and Regulations 24 Even SRC Rule 3(1)(f) of the original 2001 Implementing Rules and Regulations of the Securities Regulation Code, using similar language, includes in the definition of "Control" the power to cause the direction of corporate policies through a contract or otherwise, viz: "Control, controlling, controlled by, and under common control with, means the possession, direct or indirect, of the power to direct voting securities, by contract, or otherwise. 21 SEC Opinion No. 14-06 dated 8 May 2014, Re: Marketing and Sale of Digital Publication through 22 Indeed, in the 1986 deliberations quoted by respondents on Page 28-29 of their Verified the final text of the Constitution merely says "mass media" and it is open-ended to adapt to the changing times

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Rule 3.1.8.225 of the 2015 Implementing Rules and Regulations of the Securities Regulation Code adds that Control exists whenever one entity has the

statute or agreement." This would be true even if the controlling entity does not power "to govern the financial and operating policies of [another] entity under a

equity) that grant influence in corporate matters. own any equity, such as through agreements (e.g. derivatives based on underlying

relation to the sanctions under Section 6(i) of Presidential Decree 902-A, as citizen of the Philippines or of any other specific country who allows his name or amended, and Section 5.1(f) of the Securities Regulation Code) penalizes any citizenship to be used for the purpose of evading constitutional or legal provisions which require Philippine or any other specific citizenship as a requisite for the profiting thereby may also be held liable. exercise or enjoyment of a right, franchise or privilege. Any alien or foreigner Section 1 of the Commonwealth Act 108, aka The Anti-Dummy Act (in

obtain a derivative that grants a measure of control over corporate matters whatsoever. Anything less than one hundred percent (100%) Filipino control, as stockholder or through any other means, is a violation. especially where the Constitution is very clear that there must be no foreign control This may include a situation where a person allows disqualified foreigners to

1991, as amended, expounds on the value of foreign investment in areas not reserved to Filipinos, while reiterating the Foreign Equity Restrictions and providing for a regularly-promulgated Foreign Investment Negative List, viz: Sections 2 and 7 of Republic Act 7042, The Foreign Investments Act of

Section 2. Declaration of Policy. - It is the policy of the State to attract, promote and welcome productive to national industrialization and socio-economic investments from foreign individuals, partnerships, corporations, and governments, including their political subdivisions, in activities which significantly contribute development to the extent that foreign investment is Iaws. Xxx allowed in such activity by the Constitution and relevant]

included in the negative list. As a general rule, there are no restrictions on extent of foreign ownership of export enterprises. In domestic market enterprises, foreigners can invest as much as one hundred percent [100%] equity except in areas

Section 7. Foreign Investments in Domestic Market enterprises unless foreign ownership therein is Enterprises. -- Non-Philippine nationals may own up to one hundred percent [100%] of domestic market prohibited or limited by the Constitution and existing

25 Same language as SRC Rule 3(1)(E)(ii) of the 2004 Amended Implementing Rules and Regulations of the Securities Regulation Code, as well as all succeeding IRRs up to the present.

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Section 8 hereof. [as amended by R.A. 8179] law or the Foreign Investment Negative List under

up to the current,2 provides that "Mass Media, except recording" shall have No Foreign Equity pursuant to Article XVI, Section 11 of the Constitution and Presidential Memorandum dated 5 May 1994. Mass Media is the very first on the negative list, the most important, and it must be 0% Foreign and 100% Filipino. The Foreign Investment Negative List (FINL), from the first promulgation

"The Commission xxx shall have the powers and functions provided by this Code, [PD] 902-A, the Corporation Code xxx and other existing laws." The term "other Law (in relation to PD 902-A), and the Foreign Investment Act of 1991. existing laws" refers to older laws enforced by the Commission at the time the SRC was enacted, e.g. the Anti-Dummy Law (in relation to PD 902-A), the Mass Media Section 5.1 of the Securities Regulation Code, enacted in 2000, states that

"impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto." Section 5.1(f) of the Securities Regulation Code grants the authority to

the Securities Regulation Code, the Commission's definition of "control" is neither limited to stock ownership nor to management in the board, but rather embraces a broad range of schemes, including equity derivatives that grant control, i.e. influence over corporate policy and actions in certain matters affecting the disqualified foreigner, and perhaps also grant economic rights to them. As can be gleaned from the 2015 Implementing Rules and Regulations of

impose the equivalent of "Revocation of Certificate of Incorporation," viz: Mass Media Law. The latter section imposes the penalty of "cancellation of permit." Under the broader and stricter Securities Regulation Code, the Commission may enforced inter alia through Section 2 in relation to Section 5 of P.D. 1018, the Circumventions of the Foreign Equity Restriction in the Constitution may be

(1) Section 5.1, SRC, regarding Existing Laws clarifies that the Mass Media Law is enforced and interpreted by the Commission;

(2) Section 5.1(f), SRC, regarding Sanctions in general, empowers the Commission to impose sanctions for violation of Mass Media Law;

(3) Section 5.1(m), SRC, regarding Revocation in particular, allows for the imposition of the penalty of Revocation of Certificate of Incorporation, i.e. the corporation's "permit" that gives legal capacity; and

(4) Section 5.1(n), SRC on Incidental Powers, leaves no doubt that the Commission may reconcile and enforce the laws in this manner.

sale of securities, it may also be considered a species of Securities Fraud. Section 26 However, if the circumvention of the foreign equity restrictions involves a

26 Number 1, List A, Tenth Regular Foreign Investment Negative List, Executive Order No. 184 dated 29 May 2015

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States ("1934 Act"), states that: of the Securities Regulation Code, the "anti-fraud" provision, based on Section 10. specifically Rule 10b-5 thereof, of the Securities Exchange Act of 1934 of the United

unlawful for any person, directly or indirectly, in Section 26. Fraudulent Transactions. - It shall be connection with the purchase or sale of any securities tO:

26.1. Employ any device, scheme, or artifice to defraud;

applicable to securities transactions, modelled after Section 10 of the 1934 Act, and to securities issued in exempt transactions.27 Section 26 requires a showing of is a basic enforcement tool to protect investors." It applies even to fraud in relation fraud or deceit, and not just negligence.28 According to the Commission, "Section 26 is a general antifraud provision

under Rule 10b-5 of the 1934 Act, the statute upon which Section 26 is based, viz: For further guidance, there are five principal elements of a fraud action

There are five principal elements for stating a claim deceit (2) by any person (3) in connection with (4) the under Rule 10b-5. The plaintiff must show: (1) fraud or purchase or sale (5) of any security. 29

granted to the Commission in Sections 5.1(f) and 5.1(n), states that: Section 71.2 of the Securities Regulation Code, in relation to the powers

SEc. 71.Validity of Contracts. - xxx

the continuance of any relationship or practice in every contract, including any contract for listing a the performance of which involves the violation of, or violation of, any provision of this Code, or any rule or regulation thereunder, shall be void: 71.2. Every contract made in violation of any provision of this Code or of any rule or regulation thereunder, and security on an Exchange heretofore or hereafter made,

of any such provision, rule or regulation, shall have made or engaged in the performance of any such (a) As regards the rights of any person who, in violation contract; and

(b) As regards the rights of any person who, not being a

28 See Lucila M. Decasa, Securities Regulation Code Annotated (2013), p. 98, citing SEC v. Court of (2001), p. 41, viz: "Section 26 of the SRC streamlines the language formerly used in Section 29 of the RSA xxx Former Section 29(c) of the RSA excepted exempt securities and exempt transactions which xxx only applied to exception from registration requirements previously contained in Sections 8 and 12 of the RSA. All other sections of the RSA were applicable to such securities - thus Section 29(c) created unnecessary confusion and was deleted. 29 Thomas Lee Hazen, The Law on Securities Regulation, 5th Ed, (2006), p.478. 27 Securities and Exchange Commission, History/Background of the Securities Regulation Code Appeals, 246 SCRA 738 (1995).

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party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason of which the making or performance of such contract was in violation of any such provision, rule or regulation.

media but also the Securities Regulation Code, the contract itself would be void. If a scheme does not only violate the foreign equity restrictions on mass

THE OMIDYAR NETWORK (ON) PDR

terms. The Commission does not consider instruments based on their issue is limited to the unique terms found only in the ON PDRs. nomenclature. Here, only the ON PDR contains a repugnant provision. Therefore, the Every security, including derivatives, must be evaluated on its unique

approval of the ON PDR Holders on corporate matters, viz: The ON PDRs contain a provision wherein the "company" is required to seek

from the date hereof and while the ON PDRs are outstanding: xxx 12.2 The Issuer undertakes to cause the Company

with ON PDR Holders and without the approval of issued and outstanding PDRs, alter, modify or Incorporation or By-Laws or take any other action where such alteration, modification, change or PDRs; xxx (Emphasis supplied) 12.2.2 not to, without prior good faith discussion PDR Holders holding at least two thirds (2/3s) of all otherwise change the Company Articles action will prejudice the rights in relation to the ON of

Inc. The ON PDR instrument may be categorized as an equity derivative, since its rights originally reserved to the shareholders. The Foreign Equity Restriction will prevent even the grant of minimal control through the ON PDR. imposes obligations not just on the Issuer of the derivative, Rappler Holdings Corporation, but also on the Company which issued the underlying shares, Rappler, value is dependent on the underlying equity. It follows that legal and economic rights granted to the ON PDR Holders can be traced back to the legal and economic As already discussed, the "Company" is Rappler, Inc. Thus, the ON PDR

Percent (100%) Filipino control is a violation. Conversely, anything more than exactly Zero Percent (0%) foreign control is a violation. The Foreign Equity Restriction is very clear. Anything less than One Hundred

stockholders, nor is it 0% control by the foreigner PDR holders. least 2/3 of the PDR Holders, meaning Rappler is at the very least under obligation to consult with Omidyar Network. The stockholder has become, in effect, subservient to the holder. It is neither 100% control by the Filipino Here, the stockholders must have prior discussion with and approval of at

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they repeatedly stated in their Verified Explanation that (1) all their stockholders give Omidyar Network Fund LLC xxx any form of control over Rappler."30 ON PDR are mere "distributions" and not strictly "dividends." Upon that erroneous are Filipino, and that (2) any economic benefits derived by foreign holders from the premise, respondents proudly stated that "Clause 12.2.2 of the ON PDR does not Respondents wrongly assume that "control" is limited to stock ownership:

stated, the Commission has already interpreted "control" as embracing not only stock ownership, but also other schemes that grant influence over corporate policy, actions, and structure--even "sometimes." corporate matters only when it "will prejudice" the PDR Holders, i.e. only sometimes, and because there is no transfer of shares, the stockholders being all Filipino and seemingly compliant, there is no grant of control. However, as already In their estimation, perhaps, because the "prior discussion" and "approval" of

is only available in certain occasions, there must be no occasion. stockholder or holder or otherwise, there must be none. It does not matter if control It does not matter what capacity or device gives the foreigner control, as

corporate policy, and not limited to ownership of stock. 100% Filipino control means 0% foreign control. "Control" is any influence over Where Mass Media is concerned, no control whatsoever may be granted.

ACADEMIC DISCUSSION ON INTENT

commission is enough. Because this is a violation of special laws, intent is immaterial. Mere

influence, or "assurance" whatsoever to any foreigner. Paragraph 12.2.2, as described by the respondents, is not consistent with the aim of the foreign equity restriction on mass media--i.e., to grant no degree of control, For instructive purposes, however, it bears discussing why the intent behind

Network a preferential, or at least equal, standing as opposed to (1) other PDR the ON PDR as stated by respondents themselves, viz: Holders, and more importantly, (2) the Issuer--it grants negative control. In fact, Omidyar Network specifically negotiated with Rappler to insert Paragraph 12.2.2 in This is not an insignificant paragraph. It was intended to "assure" Omidyar

than Omidyar Network Fund LLC. Network Fund LLC decided to purchase the [ON PDRs], NBM Rappler LP had already purchased PDRs from RHC. Also, NBM Rappler LP purchased more PDRs [I]t is important to remember that, at the time Omidyar

On account of this situation, Omidyar Network Fund because of the possibility that RHC may later agree to give NBM Rappler LP more benefits than Omidyar Network Fund LLC. Also, Omidyar Network Fund LLC LLC was concerned that it was at a disadvantage

30 Page 22 of Verified Explanation filed 29 August 2017.

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 14 of 29

RHC sells PDRs to other investors. did not want to be placed at a further disadvantage if

secure the approval of at least two-third (2/3) of all the ON PDR, which rights do not include ownership31 supplied) Omidyar Network Fund LLC had RHC agree to the PDR Holders before RHC takes any action that would prejudice the rights of Omidyar Network under and [management]32 over Rappler or RHC.33 (Emphasis For these reasons and to protect its investment,

degree of control over Rappler's corporate policy. Paragraph 12.2.2 was intended holders, but inevitably also control over Rappler. to_give the foreign holder some degree of control, ie. control over other PDR In other words, Omidyar Network specifically wanted to have some some

results in an expectation of either control or returns from the investor. This is why there was a reluctance to accept more capital from the Filipino shareholders, viz: Respondents themselves believe that a substantial investment, such as this

1.11 It is important to point out, however, that the technology specialists who all work together to come up with decisions on important matters. Under this set up, the journalists in the group have been given both commercial and editorial powers. If the businessmen stockholders and Directors of RAPPLER are made up of independent investigative journalists, businessmen, and stockholders put up more capital, they may have the power to later override the commercial and editorial powers given to the journalist stockholders.34

cannot expect a reasonable person to believe that investors of over a million dollars, such as Omidyar Network Fund LLC, do not desire control, viz: Given their presupposition that investment leads to control, respondents

in companies even if the monetary returns are minimal as long as the business has the potential to give value to 1.33 Omidyar Network is known to make investments the greater community.35

Maybe to "give value to the greater community," but definitely to gain control. If not for Returns, for what purpose then is the investment? Control.

31 The word "ownership" is evidently used by respondents here to refer to stock ownership only. respondents stated that "control and manager 33 Pages 23-24 of Verified Explanation filed 29 August 2017. 34 Page 6 of Verified Explanation filed 29 August 2017. 32 Respondents used the word "control," but the replacement word "management" better fits the context, in the sense of being Directors or Officers. Respondents erroneously imply that "control" is merely synonymous to "management." On Page 24 of their Verified Explanation, 35 Page 15 of Verified Explanation filed 29 August 2017. nent of RAPPLER rest in its Directors and Officers."

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Thus, if Paragraph 12.2.2 appears to grant control (i.e. influence over corporate policy, sometimes) to Omidyar Network, it is because it was specifically

become a Dummy, as long as Omidyar was not given "equity" per se. inserted by Rappler to grant such control. Rappler colluded to grant control, or to

one, not subscribed before a Notary or a Philippine Consulate. It was executed as Investigation. It is obviously inadmissible, a mere scrap of paper. purported Waiver of Paragraph 12.2.2 of the ON PDR. The document is a private recently as 11 December 2017, more than four (4) months since the start of Formal Recall that on 22 December 2017, respondents submitted a photocopy of a

Paragraph 12.2.2 was intentionally placed in the ON PDR by respondents, with the consent of Omidyar. It does not remove Paragraph 12.2.2, rather the purported Waiver states that it "is not intended as, and shall not constitute, an admission or acknowledgment by any Party that the PDR Instrument or Section 12.2.2 thereof is invalid or otherwise contrary to law xxx" Therefore, the purported Waiver is of tilt the balance of weight and sufficiency of evidence in their favor. no substantial value to the Formal proceedings against respondents. It failed to However, even if given due course, the waiver would not negate the fact that

ENGAGED IN MASS MEDIA

three reasons: (1) Rappler fits the definition of Mass Media; (2) Rappler consistently be Mass Media and thus prohibited from directly issuing shares to raise capital. claim Rappler Inc. is not engaged in Mass Media.36 The Commission disagrees for claimed to be Mass Media; and (3) Rappler's scheme reveals that it believes itself to In an attempt to evade the foreign equity restriction, Respondents absurdly

was not further defined in the Constitution itself, evidently to adapt to changing times and to new technologies that may arise after 1987. Precisely to adapt to administrative agencies. Today's legislature considers internet or online media a lead of the legislature and considers internet or online media as Mass Media and subject to the Foreign Equity Restrictions of the Constitution. changing times, wide discretion has been given to the legislature and to type of Mass Media. The Commission, an administrative agency, has followed the Rappler Inc. fits the description of Mass Media. The term "Mass Media"

the masses and that tends to set the standards, ideals and aims of the masses, the distinctive feature of which is the dissemination of information and ideas to the public, or a portion thereof.37 The citizenship requirement is intended to prevent the use of such facilities by aliens to influence public opinion to the detriment of the best interests of the nation.38 "Mass Media" refers to any medium of communication designed to reach

of Mass Media found in the Tobacco Regulation Act of 2003, which notably includes electronic media including the internet, viz: For some years now, the Commission has recognized the statutory definition

communication designed to reach a mass of people. "Mass Media" refers to any medium of

38 Ministry of Justice Opinion No. 24, Series of 1986. 37 Department of Justice Opinion No. 40, Series of 1998. 36 Page 28 of Verified Explanation filed on 29 August 2017.

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 16 of 29

For this purposes, mass media includes print media internet.39 such as, but not limited to, newspapers, magazines, and publications; broadcast media such as, but not limited to, radio, television, cable television, and cinema; electronic media such as but not limited to the

Indeed, recent opinions on Mass Media specifically cite this definition, viz:

With the continuing evolution and proliferation of information that was previously restricted to a select propaganda. Thus, the internet and mobile digital communication technology, i.e. internet and mobile technology, individuals are now exposed to group, making them susceptible to the influence of modern mass media techniques such as advertising and technology have become recognized platforms for mass media. In our jurisdiction. internet in the definition of mass media.40 Regulation Act_of 2003 specifically includes the theTobacco

transmission What matters to the Commission in determining what is "mass media" is the of information to the masses through "any medium of

but are nonetheless embraced by the spirit and intent of the law, which is to prevent foreigners from wielding influence over the minds of the Filipino people. communication," which includes technologies that were not present at the time41 the Constitution was drafted (e.g. Internet, Mobile Technology, and Social Media)

owes its success to being accepted as a newer form of Mass Media, i.e. online media, on par with print media and broadcast media. The medium is different, but the function is the same: to communicate ideas to the masses. Rappler Inc. made these Rappler Inc. consistently claimed to be Mass Media. In fact, Rappler Inc.

consistent claims before the Commision, the Courts, and the Public, viz:

- Rappler Inc. claimed to be a Mass Media entity before the Commission. information and social network services including but not limited to other related services and packages provided it will not act as an internet service provider." In its Articles of Incorporation dated 25 July 2011 and also in its Amended Articles of Incorporation dated 16 April 2014, Rappler Inc. stated that its Primary Purpose is "to design, develop, establish, market, sell, maintain, support, distribute, customize, sell, re-sell and/or operate news. contents, platforms, systems and/or applications via web, internet, corporate social responsibility, marketing, PR, events, brand affinity and mobile, and other delivery formats; communications, advertising,

39 Section 4(f) of R.A. 9211, Tobacco Regulation Act of 2003. 40 SEC Opinion No. 14-06 dated 8 May 2014, Re: Marketing and Sale of Digital Publication through the Internet and Mobile Technology; Advertising; Mass Media. Explanation filed on 29 August 2017, there were only two types, print and broadcast. However, the final text of the Constitution merely says "mass media" and it is open-ended to adapt to the changing times. +1 Indeed, in the 1986 deliberations quoted by respondents on Page 28-29 of their Verified

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 17 of 29

Furthermore, in its annual General Information Sheet (GIS) from 2012

maintain, operate news, information, and social network services." 2017, Rappler Inc. stated that its Primary Purpose is "to design, develop,

The Commission would normally consider an entity whose stated business consists of the creation and distribution of news and information a Mass Media entity, after all:

The term "mass media" shall mean the gathering. transmission of news, information, messages signals, and forms of written, oral and all visual communication xxx42 (Emphasis supplied)

traditional or online, to transmit the news and information to the Filipino masses. Pertinently, the Commission's database shows that Rappler Inc. is listed under the Industry Classification of "News Agency Activities, Obviously, this involves the use of a medium of communication, either which makes it of the same class as print and broadcast entities.

- Rappler Inc. claimed to be a Mass Media entity before the Courts. In the Supreme Court case of Rappler v. Andres Bautista,43 which concerned a proposed Memorandum of Agreement (MOA) granting equal access to Mass Media entities (including Rappler Inc.) of the presidential debates, the Court stated that:

In this petition for certiorari and prohibition, render judgment: petitioner [Rappler Inc.] prays for the Court to

a. Declaring null andvoid, for being

unconstitutional, pertinent parts of the Memorandum of Agreement that violate the

20 [of the MOA];xxx rights of the Petitioner, specifically Part VI (C), paragraph 19 and Part VI (D), paragraph

d. Pending resolution of this case, issuing a Preliminary Mandatory Injunction

Debates. requiring the Respondent to ensure an unimpaired and equal access to all mass media, online or traditional, to all the

an online Mass Media entity. Under Part VI(C), Paragraph 17 of the assailed MOA, the Lead Networks (composed of print and broadcast entities), were allowed to broadcast the debates on their respective websites and social media sites, while Rappler Inc. was not allowed to do so. Rappler Inc. thus argued that online mass media should be on equal footing. Thus, Rappler Inc. considered itself entitled to equal rights to Free Press as

42 Villanueva and Tiansay, Philippine Corporate Law (2013), p. 61 (citing P.D. 36, as amended by P.D. Opinion dated 15 July 1991, based on P.D. 36, as amended by P.D. 191 and 197). 43 G.R. No. 222702, April 5, 2016. 191 and 197). See also Lucila M. Decasa, Handbook on Private Corporations (2009), p. 305 (citing SEC

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 18 of 29

The Supreme Court, in ruling for Rappler Inc. in that case, agreed that Rappler Inc. is an online Mass Media entity, entitled to equal rights with traditional forms of mass media, such as print and broadcast, essentially because their "capacity" (function) is the same--to inform the public, viz:

the audio of the debates is denied petitioner and other online media entities, which also have [T]his right to broadcast by live streaming online

the capacity to live stream the audio of the debates.

XXX

The political nature of the national debates and the public's interest in the wide availability of shown or streamed in other websites for MOA. the information for the voter's education certainly justify allowing the debates to be wider dissemination, in accordance with the

live streamed in other websites, including the petitioner's [Rappler Inc.'s] xxx Therefore, the debates should be allowed to be

: Rappler Inc, claimed to be a Mass Media entity to the Public. In the

article entitled Omidyar Network invests in Rappler,44 it was stated that:

through the use of social media and mobile Created by award-winning journalists and news managers xxx Rappler became the Philippines first all-digital news organization in January 2012, combining technology and crowdsourcing

systems and distribution channels. broadcasting with the internet, phone to merge traditional reinventing television

XXX

Rappler is the first and only media startup in the xxx in offering Philippine Depositary Receipts or PDRs to international investors. xxx Philippines to join broadcasting network giants

XXX

The largest independent news group in Southeast Asia, Rappler was ranked the after a little more than a year and a half. It has Philippines' 3rd top online news site by Alexa

44 Published on www.rappler.com on 5 November 2015.

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 19 of 29

won numerous awards since then, most recently in October [2015], the UN's World Summit Awards, which said it's among the world's "best and most innovative digital innovation," the only Asian media group to win the Media & News category.

XXX

"Rappler combines credibility of traditional the discipline print and TV and

journalists with the pace and knowledge of millenials," said [Rappler's Managing Editor].

that Rappler Inc. is engaged in Mass Media, respondents are estopped from raising the argument that Rappler, Inc. is not engaged in Mass Media, viz: Given these consistent claims to the Commission, the Courts, and the Public

Through estoppel an admission or

thereon.45 representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying

thus prohibited from directly issuing shares to raise capital. In fact, the actions of both respondents leave no doubt that they consider themselves as alter egos and equally bound to observe the 100% Filipino Control requirement. Rappler's scheme reveals that it believes itself to be Mass Media and

issue the PDRs if it was not a mass media entity. Rappler Inc. could have just issued though various media of communication. stock directly to Omidyar Network Fund LLC. Rather, it truly believed itself to be a mass media entity because it publishes news and information, for the masses. Rappler Inc. would not have had to create Rappler Holdings Corporation to

the transfer of control. So that no "equity" per se would be transferred, the alter ego its "global impact investors," Rappler Inc. created an alter ego that would validate would issue an equity derivative. If Rappler Holdings Corporation were not a mere alter ego of Rappler, Inc., it could issue its own stock; and yet, because it was, respondents opted to issue instead the ON PDR. Aware of the Constitutional restrictions, and yet eager to receive capital from

SUBSTANTIAL EVIDENCE

substantial evidence,46 which is "that amount of relevant evidence which a persons who read Paragraph 12.2.2 of the ON PDR would agree that there is some reasonable mind might accept as adequate to support a conclusion." Reasonable The standard adopted by administrative agencies such as the Commission is

46 Rule 133, Section 5 of the Rules of Court. 45 Article 1431 of the Civil Code.

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 20 of 29

control--definitely not zero--granted to the foreign holder. It clearly says that when a corporate action would affect the PDR Holders, the stockholders must consult the ON PDR holders and obtain their approval. Thus, there is substantial evidence of a violation of the Foreign Equity Restriction.

PIERCING THE CORPORATE VEIL

However, several key facts suggest that Rappler, Inc. is a mere alter ego of the issuer and thus its separate juridical personality must be disregarded. the ON PDR would clearly fall on the issuer, Rappler Holdings Corporation. Primary liability for any violation of law arising out of the issuance of

circumventing the Foreign Equity Restrictions on Mass Media that apply to Rappler, Rappler Holdings Corporation would extend to Rappler, Inc. Conversely, liability for Inc. would extend to Rappler Holdings Corporation. If respondents are mere alter egos, liability for the ON PDR issuance of

In 2015, the year of the ON PDR transaction: 47

1. Rappler, Inc. was wholly-owned (98.77%) by Rappler Holdings Corporation;

1 Shareholders of Rappler, Inc. as of 31 July 2015 Rappler Holdings Corporation 112,217,181 Shares Percentage 98.76872%

6. 3. 2 4. 5. 7 Dolphin Fire Group, Inc. DMT Ice Angels Holdings, Inc. Ma. Teresa D. Vitug Maria Angelita Ressa Benjamin So Glenda M.Gloria 637,496 436,535 211,221 25,000 38,671 25,000 0.18591% 0.02200% 0.56110% 0.38422% 0.03404% 0.02200%

TOTAL 8.Ma. Rosario F. Hofilena 10. Nico Jose Nolledo 11. James C. Bitanga 12. Felicia Atienza 9. 13. James Velasquez Manuel I. Ayala 113,616,109 25,000 1 1 1 Y 100.0000% 0.02200% 0.0000% 0.0000% 0.0000% 0.0000% 0.0000%

2. Rappler, Inc. and Rappler Holdings Corporation had 5 interlocking Directors;

Directors of Rappler, Inc. Glenda M. Gloria James Velasquez Manuel I. Ayala (Chairman) Maria Angelita Ressa Nico Jose Nolledo James C.Bitanga Felicia Atienza Directors of Rappler Holdings Corporation Maria Angelita Ressa Nico Jose Nolledo Manuel I. Ayala (Chairman) Glenda M.Gloria James C.Bitanga

3. Rappler, Inc. and Rappler Holdings Corporation had identical Officers;

James C. Bitanga (Treasurer) Officers of Rappler, Inc. Maria Angelita Ressa (President) James C. Bitanga (Treasurer) Maria Angelita Ressa (President] Officers of Rappler Holdings Corporation

47 See 2015 General Information Sheet of Rappler, Inc.

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 21 of 29

Jose Maria G. Hofilena (Secretary) Jose Maria G. Hofilena (Secretary)

4. Rappler, Inc. and Rappler Holdings Corporation operated from the same office

5. Rappler, Inc. and Rappler Holdings Corporation simultaneously negotiated with the PDR investors, through their President-in-common, Ms. Maria Ressa.

laid down by the Supreme Court in Concept Builders, Inc. v. NLRC,48 viz: Note the probative factors that should be considered in Alter Ego cases, as

: Stock ownership by one or common ownership of both corporations; Methods of conducting the business. The manner of keeping corporate books and records; and Identity of directors and officers;

would be proper to pierce the corporate veil to hold an alter ego liable, viz: The Supreme Court likewise laid down a three-tiered test on whether it

(a) Control, not mere majority or complete stock control, but complete domination, not only of finances but of

policy and business practice with respect to the transaction attacked so that the corporate entity as to

or existence of its own; this transaction had at the time no separate mind, will

(b) Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of statutory or other positive legal duty, or dishonest and unjust act in contravention of plaintiff's legal rights;

of.49 (Emphasis supplied) proximately cause the injury or unjust loss complained

both corporations--to the point that they are almost identical--they have the same from the other; and when their President-in-common speaks, it is for both.50 Chairman, Members of the Board, President, Treasurer, and Secretary. Rappler Holdings Corporation wholly-owns Rappler, Inc. Moreover, with regard to the PDR deals, the interest of each of the respondent is inseparable and indistinguishable Here, there is an undeniable overlap in the ownership and management of

2014 for the sole purpose of raising capital through the issuance of PDRs to foreign entities. The timing of Rappler Holding Corporation's registration is subsequent to Ms. Maria Ressa's pre-issuance talks with Omidyar Network51 (October to Rappler, Inc. evidently created Rappler Holdings Corporation in December

48 257 SCRA 149 (1996). 49 Id. See also Villanueva and Tiansay, Philippine Corporate Law (2013), p.101 50 See, e.g., Request for Extension of Time filed on 17 August 2017 by Ms. Maria Ressa: "Gentlemen, I am the President and Chief Executive Officer of Rappler, Inc. (RAPPLER) and Rappler Holdings Corporation (RHC). On behalf of RAPPLER and RHC, I respectfully request an extension of 51 Page 15 of Verified Explanation filed 29 August 2017. time xxx

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001

Page 22 of 29

securities for the issuance of Philippine Depositary Receipts that same year. onwards). In 2015, Rappler, Inc. increased it capital stock and sold practically all its shares to Rappler Holdings Corporation, which the latter used as underlying November 2013; April 2014 onwards) and North Base Media52 (January 2014

identity of interests and no independent mind, in a manner similar to this: scheme whereby stock ownership and board management would strictly-speaking would be granted to foreigners holding equity-derivative instruments. The scheme remain with Filipinos, while control (i.e. the ability to influence corporate policy) necessarily required the respondents the act in total concert with each other, with Together, Rappler, Inc. and Rappler Holdings Corporation partook of a

Rappler, Inc. sold practically all its shares (even increasing its authorized corporation and all their shareholders-of-record were Filipino; capital stock for this purpose) to Rappler Holdings Corporation, each

Through the equity derivative issued by Rappler Holdings Corporation to Omidyar Network, pertaining to shares of Rappler, Inc., partial control (i.e. influence over corporate policy) was granted to the foreign Holder;

The Foreign Holder, Omidyar Network, benefits through the ON PDR in two ways: (1) influence over the shareholders on relevant corporate matters; and (2) cash distributions, through a pass-through arrangement.53

. In addition to Paragraph 12.2.2, through which Rappler, Inc. (the "Company") in the ON PDR wherein Rappler Holdings Corporation (the "Issuer") dividend and (c) primary purpose, viz: likewise grants control to Omidyar Network Fund LLC, with regard to the latter's corporate policy on (a) financing to pay taxes, (b) type of grants a measure of control to the PDR Holders, there are other provisions

8. Taxation and Stamp and Other Duties 8.2 xxx Notwithstanding anything to the contrary, the financing specifically to settle said tax assessment xxx Issuer through its Board of Directors, and upon the affirmative vote of PDR Holders holding at least two thirds (2/3) of all outstanding PDRs, may obtain

xxx In the event that the Company grants an option to as to what type of dividend the Issuer should receive. receive shares or cash in respect of a dividend, the Issuer shall seek instructions from the ON PDR Holders 10.1 Distribution of Shares

otherwise change its Articles of Incorporation or By- 12.1.2 [The Issuer] will not, without prior good faith approval of Holders holding at least two thirds (2/3) of all issued and outstanding PDRs, alter, modify or 12. Undertakings discussions with ON PDR Holders and without the

53 Paragraph 12.1.8 of the ON PDR states that: "[The Issuer] will declare and pay or otherise 52 Page 8 of Verified Explanation filed 29 August 2017. transfer distributions to the ON PDR Holder promptly after receipt of a dividend distribution from the Company xxx"

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changing its primary purpose as a holding company or laws or take any other action with the objective of expanding its business as presently set out xxx

aligned and both of them grant control to Omidyar through the ON PDR. Evidently, the interests of Rappler, Inc. and Rappler Holdings Corporation are

Holdings Corporation are mere alter egos of each other and equally liable. Any restrictions on Rappler, Inc. also attach to Rappler Holdings Corporation. Therefore, there is substantial evidence that Rappler, Inc. and Rappler

POWER TO IMPOSE SANCTIONS

"impose sanctions for the violation of laws and the rules, regulations and orders issued pursuant thereto." Section 5.1(f) of the Securities Regulation Code grants the authority to

Equity Restrictions in Mass Media, enshrined in the Constitution and enforceable through the Mass Media Law, the Anti-Dummy Law, and the Foreign Investment the fundamental law of the land, hence the gravity of the offense. Act. The statutes and administrative rules merely reflect and reiterate a sacred duty Here, there is substantial evidence that respondents violated the Foreign

and is compliant with the law, and that, alternatively, (2) they are not engaged in mass media and thus exempt from the law. In response to both arguments, the Commission disagrees with respondents and advances its own interpretation of "control," pursuant to its broad mandate as the specialized agency in charge of enforcing the law on corporations, securities, and foreign investment. Recall that respondents argued that (1) the ON PDR does not grant control

stock or management in the board. Upon this premise, they devised a scheme where no foreigner would own stock or sit on the board. The scheme employed by via the terms of an equity derivative-is not a harmless circumvention. respondents--making the ownership and management appear "Filipino" on paper. while granting control (i.e. influence over corporate policy) to Foreign Investors Respondents' true error lies in equating "control" with ownership of

THE ON PDR IS VOID

granted to the Commission in Sections 5.1(g) and 5.1(n) thereof, states that: Section 71.254 of the Securities Regulation Code, in relation to the powers

SEC. 71. Validity of Contracts. - Xxx

71.2. Every contract made in violation of any provision the performance of which involves the violation of, or of this Code or of any rule or regulation thereunder, and every contract, including any contract for listing a security on an Exchange heretofore or hereafter made.

54 Section 71.2 is an administrative penalty within the ambit of Section 54.1(v) "Other penalties within the power of the Commission to impose" in relation to Section 54.1(a) "If after due notice, the Commission finds that there is a violation of this Code, its rules, or its orders.

IN RE:RAPPLER,INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001

Page 24 of 29 the continuance of any relationship or practice in violation of, any provision of this Code, or any rule or regulation thereunder, shall be void:

contract; and of any such provision, rule or regulation, shall have made or engaged in the performance of any such (a) As regards the rights of any person who, in violation

was in violation of any such provision, rule or of which the making or performance of such contract (b) As regards the rights of any person who, not being a party to such contract, shall have acquired any right thereunder with actual knowledge of the facts by reason regulation.

mass media, but also the Securities Regulation Code. Thus, the ON PDR is void. Here, the scheme employed by the respondents not only violated the laws on

based on Section 10, specifically Rule 10b-5 thereof. of the Securities Exchange Act of 1934 of the United States ("1934 Act"), states that: Section 26 of the Securities Regulation Code, the "anti-fraud" provision,

Section 26. Fraudulent Transactions. - It shall be connection with the purchase or sale of any securities unlawful for any person, directly or indirectly, in to:

26.1. Employ any device, scheme, or artifice to defraud;

is a basic enforcement tool to protect investors." It applies even to fraud in relation to securities issued in exempt transactions.55 Section 26 requires a showing of fraud or deceit, and not just negligence.56 applicable to securities transactions, modelled after Section 10 of the 1934 Act, and According to the Commission, "Section 26 is a general antifraud provision

under Rule 10b-5 of the 1934 Act, the statute upon which Section 26 is based, viz: For further guidance, there are five principal elements of a fraud action

There are five principal elements for stating a claim deceit (2) by any person (3) in connection with (4) the purchase or sale (5) of any security. 57 under Rule 10b-5. The plaintiff must show: (1) fraud or

Sections 8 and 12 of the RSA. All other sections of the RSA were applicable to such securities thus Section 29(c) created unnecessary confusion and was deleted. 56 See Lucila M. Decasa, Securities Regulation Code Annotated (2013), p. 98, citing SEC v. Court of 57 Thomas Lee Hazen, The Law on Securities Regulation, 5th Ed, (2006), p.478. 55 Securities and Exchange Commission, History/Background of the Securities Regulation Code (2001), p. 41, viz: "Section 26 of the SRC streamlines the language formerly used in Section 29 of the RSA xxx Former Section 29(c) of the RSA excepted exempt securities and exempt transactions which xxx only applied to exception from registration requirements previously contained in Appeals,246 SCRA 738 (1995)

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 25 of 2 9

returns, to foreign investors when they sold the ON PDR, a security. acted with deceit in a scheme to justify the grant of control, and also financial Here, there is substantial evidence that respondents, who are alter egos

Putting together all the evidence, the scheme that emerges is this:

Incorporated in 2011, Rappler, Inc. publishes news and other information intended for the masses via the internet, mobile devices!

and other media of communication;

o Rappler, Inc. has all-Filipino shareholders, directors, and officers;

o In 2013 and 2014, Rappler, Inc. obtained commitments from foreigr investors, to whom it will grant control (but not in the form of stock the form of dividends) in exchange for over a million dollars; ownership or management on the board) and/or returns (but not in

o In December 2014, Rappler, Inc. needing a way to legalize the receipt purpose of issuing PDRs which derive their value from equity; of foreign money, but unable issue its stock directly or give seats on its board, formed Rappler Holdings Corporation, intended for the sole

Rappler Holdings Corporation also has all-Filipino shareholders directors, and officers, because the buyer of the shares of a mass media entity, like Rappler, Inc., has to be owned entirely by Filipinos;

In 2015, Rappler Holdings Corporation, a mere instrumentality of to two foreign investors, North Base Media and Omidyar Network; Rappler, Inc., purchased the latter's shares and then issued derivatives

O Because Omidyar was the later purchaser and the purchased of less

PDRs, it caused the insertion of certain provisions that assure control over other PDR Holders, and also over the corporate policies of Rappler, Inc. and its alter ego Rappler Holdings Corporation;

O NBM's PDR, although also called "PDR," does not contain these terms;

O Omidyar Network does not, by owning the ON PDR, become a

stockholder of either Rappler, Inc. or Rappler Holdings Corporation

O Rappler Inc., the Philippine mass media entity, intentionally granted

more than 0% control (influence over corporate policy) to Omidyar;

Rappler Holdings Corporation, the alter ego, also intentionally granted more than 0% control (influence over corporate policy)to Omidyar;

o The ON PDR also grants financial returns through a pass-through arrangement, where any amount Rappler Holdings Corporation would receive from Rappler, Inc. as cash dividends would then pass-through entirely to the ON PDR Holders as "cash distributions";

O Financial returns have not accrued to Omidyar because Rappler, Inc does not have any retained earnings and cannot declare dividends;

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 26 of 29

Through the ON PDR, a security, Omidyar Network has more than 0% control of a Filipino mass media entity and its alter ego;

O The ON PDR is not stock (i.e. "equity"), but it gives to its Holders

certain rights derived from equity and reserved to Filipinos;

Rappler, Inc. and Rappler Holdings Corporation filed a Notice for Exemption claiming that the ON PDR issuance was an exempt 20 persons under Section 10(k) of the SRC; transaction, i.e. a sale of securities within the Philippines to less than

O As private corporations, and because they claim the ON PDR issuance

is an Exempt Transaction, Rappler, Inc. and Rappler Holdings Corporation were not required to submit a copy of the ON PDR.

foreign investor would be theoretically defensible--the investor would never own within Section 26 (the Anti-Fraud provision) of the Securities Regulation Code. "stock" and would never receive "dividends," and he would never become an officer form of negative control and cash distributions, all through a private contractual arrangement. Since this deceptive scheme involves the sale of a security, it falls created an elaborate scheme, upon which its receipt of over a million dollars from a or director, but respondents would still be able to give him his money's worth in the Therefore, there is substantial evidence that respondents intentionally

impose penalties on the respondents themselves. fraudulent scheme is a violation of the Securities Regulation Code. Therefore, the ON PDR is void pursuant to Section 71.2 of the SRC. Given the blatant attempt to circumvent the fundamental law of the land, however, it seems proper to also Without prejudice to its character as a violation of the Constitution, this

REVOCATION OF CERTIFICATE OF INCORPORATION

Constitution provides that: The Foreign Equity Restriction in Article XVI, Section 11(1) of the

"The ownership and management of mass media shall be limited to citizens of the Philippines, or to owned and managed by such citizens. xxx" corporations, cooperatives or associations, wholly-

"The ownership and management of mass media shall be limited to citizens of the Philippines, or to corporations or associations wholly owned and managed by such citizens."

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION

SP Case No. 08-17-001

Page 27 of 29

The constitutional and statutory Foreign Equity' Restrictions in Mass Media must be related to the broader state policy in Article II, Section 19 of the Constitution which declares that:

effectively controlled by Filipinos." "The State shall develop a self-reliant and independent national economy

Regulations of the Securities Regulation Code defines "Control" as "the power to determine the financial and operating policies of an entity in order to benefit from In this regard, Rule 3.1.8 of the 2015 Implementing Rules and

its activities." The Commission's definition is intentionally broad and does not

director or officer. equate "control" with either ownership of shares of stock or with management as

Securities Regulation Code adds that Control exists whenever one entity has the power "to govern the financial and operating policies of [another] entity under a statute or agreement." This would be true even if the controlling entity does not equity) that grant influence in corporate matters. own any equity, such as through agreements (e.g. derivatives based on underlying Rule 3.1.8.2 of the 2015 Implementing Rules and Regulations of the

communication." The harm is implicit in the grant of control to a foreigner, as Mass Media is absolute. It means to isolate the Filipino masses from all foreign influence (even apparently "harmless" ones) sent via "any medium of respondents did here. The Constitutional and Statutory prohibition with regard to foreign control of

0% control to foreigners; control no less than 100% reserved to Filipinos. rights attached to equity--even in the guise of an equity derivative. The ON PDR requirement of "prior discussion" and "approval of 2/3" was a grant of more than Also, the restriction on foreign equity prevents any scheme to transfer

Regulation Code and its Implementing Rules, they erroneously posit that the ON stock (equity) or grant managerial positions as Director or Officer. PDR transaction is perfectly valid simply because it does not confer title to shares of Because respondents' concept of "Control" is inconsistent with the Securities

Verified Explanation. Respondents stress that Rappler, Inc. did not directly issue shares of stock, while admitting that the foreign investor, Omidyar Network, profited from their scheme: Not surprisingly, therefore, there is no effort to hide their scheme in their

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001

Page 28 of 29

xxx a foreign investor may validly profit from a corporation with a foreign equity restriction.

In the case of xxx Omidyar Network Fund LLC, [it] did not acquire ownership or [management] over RAPPLER, and even RHC, by purchasing the PDRs. To reiterate, xxx Omidyar Network Fund LLC did not become Ia stockholder] of RAPPLER or RHC. [It was] not given any power to vote the shares of RHC in RAPPLER and [it was] not given the right to receive dividends from distributions, if any, that RHC would give [it].58 either RAPPLER or RHC. [It] profits from cash

Mass Media Law. The latter section imposes the penalty of "cancellation of permit." Under the broader and stricter Securities Regulation Code, the Commission may enforced inter alia through Section 2 in relation to Section 5 of P.D. 1018, the impose the equivalent of "Revocation of Certificate of Incorporation," viz: Circumventions of the Foreign Equity Restriction in the Constitution may be

(1) Section 5.1, SRC, regarding Existing Laws clarifies that the Mass Media Law is enforced and interpreted by the Commission;

(2) Section 5.1(f), SRC, regarding Sanctions in general, allows the Commission to impose sanctions for violation of Mass Media Law;

(4)Section 5.1(n), SRC on Incidental Powers, leaves no doubt that the Commission may reconcile and enforce the laws in this manner.

Revocation of Certificate of Incorporation in case of corporations that employ deceptive schemes that aim to circumvent the Constitution's foreign equity and deceptively granted more than 0% control to a disqualified foreigner. restrictions in Mass Media. Here, there is substantial evidence that respondents acting as alter egos, and through unique terms of the ON PDR issuance, intentionally The Commission has the power to impose the administrative penalty of

As an additional penalty, the Commission can declare void the ON PDR itself.

58 Page 39 of Verified Explanation filed on 29 August 2017. Mention of North Base Media omitted.

IN RE: RAPPLER, INC AND RAPPLER HOLDINGS CORPORATION SP Case No. 08-17-001 Page 29 of 29

Rappler Holdings Corporation, a Mass Media entity and its alter ego, liable for WHEREFORE, premises considered, the En Banc finds Rappler, Inc. and

violating the constitutional and statutory Foreign Equity Restrictions in Mass Media, enforceable through laws and rules within the mandate of the Commission.

The En Banc hereby imposes the following administrative penalties:

(1) The Omidyar PDR is declared VOID pursuant to Section within the ambit of Section 26.1 of the SRC; 71.2 of the SRC, for being a fraudulent transaction

(2) REVOCATION OF CERTIFICATE OF INCORPORATION on each respondent--Rappler, Inc. being the mass media entity that sold control to foreigners, and Rappler Holdings Corporation being its alter ego, existing for no other purpose than to effect a deceptive scheme to circumvent the Constitution.

appropriate action. Let a copy of this DECISION be furnished the Department of Justice for

SOORDERED

Pasay City, Philippines; 11 January 2018.

TERESITA J. HERBOSA A Chairperson

ANTONIETA F. IBE Commissioner H EPHYRO LUIS B.AMATONG Commissioner 1w

BLAS JAMES G. VITERBO * Commissioner EMILIO'B.AQUINO Commissioner

*Did not take part

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