SEC En Banc Case No. 05-13-292 In the matter of: BOT Lease and Finance Philippines, Inc. vs. Corporate Governance and Finance Department (formerly Investor Protection and Surveillance Department)

Securities and Exchange Commission COMMISSION EN BANC Republic of the Philippines Department of Finance

IN THE MATTER OF: PHILIPPINES, INC. BOTLEASE AND Appellant, FINANCE

-versus- SEC En Banc Case No. 05-13-292

Promulgated: 08 November 2022

INVESTOR PROTECTION AND SURVEILLANCE DEPARTMENT, Appellee. X

DECISION

and directed it to file an exemption. Surveillance Department ("IPSD") which found that the loan agreements that it executed were securities in the form of evidence of indebtedness, May 2013 ("Appeal"), filed on 20 May 2013 by B0T Lease and Finance Philippines, Inc. ("BOT Philippines"), assailing the Letter-Decision dated 29 April 2013 ("Assailed Decision") of the then Investor Protection and Before the Commission is the Memorandum on Appeal dated 17

THE RELEVANT FACTS

and BOT Tokyo agreed to an interest rate ranging from 1.17% to 6.45% payable within two (2) to five (5) years. loan in the aggregate amount of Three Hundred Sixteen Million Five parent, BOT Tokyo. The loan documents disclosed that BOT Philippines Hundred Seventy-One Thousand Four Hundred Three Pesos (P316,571,403.00) (the "Loan Amount") which it obtained from its Audited Financial Statements ("AFS") which disclosed, among others, a In 2013, B0T Philippines filed with the Commission its 2012

for BOT Philippines to file a request for exemption for the issuance of the Articles of Incorporation of BOT Philippines, a conference was called and conducted by the IPSD which resulted in the issuance of a directive Subsequently, in relation to the application for an Amendment of

1 Now the Enforcement and Investor Protection Department (EIPD)

In the matter of BOT Lease and Finance Philippines, Inc SEC En Banc Case No. 05-13-292 Page 2 of 11 DECISION

pursuant to the SEC Memorandum Circular No. 4, Series of 2011 ("MC No 4). commercial papers covering the Loan Amount, and to pay the filing fee.

of One Hundred Twenty Million Four Hundred Thirty-Nine Thousand 2011 or the date of effectivity of MC No. 4, consistent with the rule that regulations should be applied prospectively.3 modification of the directive, and argued that the request for exemption should cover only the four (4) Loan Agreements, in the aggregate amount Eighteen and 91/100 Pesos (P120,439,018.91), executed after 16 June In a letter dated 22 May 2012, B0T Philippines requested for the

available under MC No. 4. that the retroactive effect of MC No. 4 was more favorable to BOT Philippines because instead of being penalized for the alleged issuance of unregistered commercial papers in violation of Securities Regulation Code (SRC) Rule 9.2(2)D, it now simply needs to secure the exemption BOT Philippines, and reiterated the directive for it to secure an exemptive relief from the Commission covering the Loan Amount. The IPSD argued On 18 June 2012, the IPSD issued a letter denying the request of

Japan and BOT Philippines were not securities; they were mere loan transactions between a parent and a subsidiary intended to finance the reconsideration of IPSD's position, and argued that the directive to file an business of the latter in the Philippines. exemptive relief is without basis since the loan agreements between BOT In its letter dated 25 September 2012, B0T Philippines sought the

reiterated its position that the loan agreements are not securities as the said instruments did not constitute an investment in the capital of BOT Philippines also argued that not all the elements of the "Howey test" are Japan which could have entitled it to a share in the latter's equity. BOT present. BOT Philippines also submitted a Position Paper, where it

maintained that BOT Philippines should file an exemptive relief covering the Loan Amounts, on the basis of the finding that the loan agreements of BOT Philippines and BOT-Tokyo are securities under the SRC On 29 April 2013, the IPSD issued the Assailed Decision which

Unsatisfied, BOT Philippines filed the present Appeal.

3 Annex "B" of the Appeal. 2 Annex "A" of the Appeal

In the matter of BOT Lease and Finance Philippines,Inc SEC En Banc Case No. 05-13-292 Page 3 of 11 DECISION

the Commission were rationalized and renamed which resulted in the to the newly created Corporate Governance and Finance Department transfer of the monitoring function of IPSD vis-a-vis financing companies (CGFD). During the pendency of the Appeal, the different departments of

the Loan Agreements of BOT Philippines and BOT Japan were securities. filed its Reply-Memorandum which supported the finding of the IPSD that In compliance with the Order dated 27 January 2014, the CGFD

the notice of exemption and the written notice of disclosure. raised, among others, that even assuming that the subject instruments from Fifty Million Pesos (P50,000,000.00) to One Hundred Fifty Million Pesos (P150,000,000.00), and removed the requirement on the filing of are securities, the Appeal has been rendered moot and academic with the effectivity of the 2015 Implementing Rules and Regulations of the SRC ("2015 SRC Rules"), which increased the threshold of debt-instruments On 17 January 2022, B0T Philippines filed a Manifestation which

circumstance which would render the case moot and academic. 2022, the CGFD maintained that there exists no supervening event or On 2 February 2022, through a Manifestation dated 31 January

ISSUE

securities in the form of evidence of indebtedness under the SRC. Agreements entered into by BOT Philippines and BOT Tokyo are Whether the IPSD (now CGFD) was correct in holding that the Loan

RULING

We grant the Appeal.

instruments. of the SRC IRR are considered as evidence of indebtedness.4 The IPSD also ruled that the said finding is in accord with the concept of "securities" under the SRC which is broad enough to cover both equity securities and debt securities, and may be in the form of bonds, notes, and similar because they are long-term commercial papers which, under Rule 3.1(H) Agreements executed by BOT Japan and BOT Philippines are securities In the Assailed Decision, the IPSD concluded that the Loan

more than three hundred sixty-five (265) days. The terms shall include, but not limited to, bonds and 4 "Long term commercial paper means an evidence of indebtedness of any person with a maturity of notes." (see page 3 of the Decision)

In the matter of BOT Lease and Finance Philippines, Inc SEC En Banc Case No. 05-13-292 Page 4 of 11 DECISION

the public, and the issuer who acts independently of the investors. rules, control is not a determining factor in considering evidence of indebtedness. SRC Rule 9.1(2)(D) does not distinguish, and even considers evidence of indebtedness issued to directors, officers, stockholders, and related interests (DOSRI) as security. The CGFD thus dismissed the argument of BOT Philippines that the concept of evidence of indebtedness as "securities" takes into account both the investor, i.e., The CGFD supported the position of IPSD by arguing that under the

Section 3.1 of the SRC defines securities as follows:

"Section 3. Definition of Terms. - 3.1. "Securities" are shares, certificate, contract, instruments, whether written or electronic in participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a character. It includes:

(a) Shares of stocks, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;

xxx" (Emphasis and underscoring supplied)

Exchange Act of 1934 bears a similar definition, to wit: The term securities as used in the United States (US) Securities

any renewal thereof the maturity of which is likewise limited." interest or participation in, temporary or interim certificate for, receipt exchange, or banker's acceptance which has a maturity at the time of issuance of not exceeding nine months, exclusive of days of grace, or debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting trust certificate, certificate of deposit, for a security, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or in general, any instrument commonly known as a 'security'; or any certificate or for, or warrant or right to subscribe to or purchase, any of the foregoing; but shall not include currency or any note, draft, bill of "The term 'security' means any note, stock, treasury stock, bond,

Court stated that the US Congress enacted a definition of "security In the US case of Reves et al vs. Ernst & Young,5 the US Supreme

5 Reves et al. vs. Ernst & Young, 494 U.S. 56, February 21, 1990.

In the matter of BOT Le SEC En Banc Case No. 05-13-292 se and Finance Philippines, Ing Page 5 of 11 DECISION

sold as an investment. Since the US Securities Act defines "security" to include "any note," the presumption is that every note is a security bears a strong resemblance to the one of the enumerated categories sufficiently broad to encompass virtually any instrument that might be and that presumption may be rebutted only by a showing that the note of instrument that does not fall under the securities category.

in deciding whether a transaction involves a "security," namely: In the said case, the family resemblance test identifies four factors

3. Whether there is a reasonable public expectation that the 2. Whether the issuer's "plan of distribution" of the instrument 4. Whether some factors such as the existence of another 1. Whether the seller's purpose is to raise money for the general investments and the buyer is interested primarily in the profit regulatory scheme significantly reduce the risk of the use of a business enterprise or to finance substantial seeks to establish some form of common trading in the notes, either for speculative or investment purposes; instruments should be treated as securities; and instrument, thereby rendering the application of the Securities Acts unnecessary. the note is expected to generate;

provides a useful framework in our own examination of the scope of the term securities. Although foreign case law is merely persuasive authority, said case

others with a promise of profits. static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek to use the money of thereof that are known or considered, or ought to be known or considered, to be such in the commercial or financial world. Thus, in the case of Gabionza vs. Court of Appeals? (the "Gabionza Case"), the Supreme Court ruled that the term "securities" embodies a flexible rather than United States of America, the SRC has adopted a broad definition of securities with the intent of covering practically all forms and varieties Just like the securities acts of other jurisdictions, specifically the

7 G.R. No. 161057, September 12, 2008. 6 Ibid.

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Hamilton Jewelers vs. Department of Corporations,8 where the California Court of Appeals ruled: We find a reiteration of the foregoing principle in the US case of

"However, as this court pointed out in Sarmento v. Arbax Packing Co. and fast rule fixes that which constitutes a 'security.' Rather, the question is determined on a case by case basis. The crucial Sobieski (1961) 55 Cal. 2d 811, at page 814 [13 Cal. Rptr. 186, 361 P.2d 906, 87 A.L.R.2d 1135], where the state Supreme Court pursued the same "crucial question" despite the fact that the transaction there involved came within the literal statutory definition of "security' (former Corp. Code, S 25008). (1964) 231 Cal. App. 2d 421, at page 424 [41 Cal. Rptr. 869], "No hard question is whether the [37 Cal. App. 3d 335] transaction comes within the regulatory purpose of the Corporate Securities Law. (Italics added.) In so stating, we cited Silver Hills Country Club v.

however ingeniously devised, to attract risk capital." (Id. at p. 814.) expect a return on their capital in one form or another." (Emphasis The purpose of the Corporate Securities Law (former Corp. Code, s capital the test of what is a security, it seems all the more clear that its objective is to afford those who risk their capital at least a fair chance supplied) 25000 et seq.) was explained by the court in Silver Hills Country Club v. security broadly to protect the public against spurious schemes, (Italics added.) "Since the act does not make profit to the supplier of of realizing their objectives in legitimate ventures whether or not they Sobieski, supra,55 Cal.2d 811, as follows: "Section 25008 defines a

securities or presumed to be securities. corporation or in a commercial enterprise or profit-making venture evidenced by a certificate, contract or other instrument, whether written or electronic in character, within the Philippines are Commission holds that all shares, participation or interests in a From the foregoing statutory and jurisprudential bases, this

a permanent improvement revolving fund, similar to a "bond." Being of debt securities or obligations of corporations such as long-term commercial and short-term commercial papers.9 A certificate of indebtedness pertains to certificates for the creation and maintenance of equivalent to a bond, it is properly understood as an acknowledgment of A certificate or evidence of indebtedness is a written representation

Decasa, Lucia M., Securities Regulations Code Annotated with Implementing Rules and Regulations, 8 Civ. No. 14067. Court of Appeals of California, Third Appellate District. February 15, 1974 (https://law.justia.com/cases/california/court-of-appeal/3d/37/330.html) 2004, 1st ed., p.7.

In the matter of BOT Lease and Finan SEC En Banc Case No.05-13-292 nce Philippines, Ing Page 7 of 11 DECISION

an obligation to pay a fixed sum of money. It is usually used for the purpose of long-term loans.10

duly filed with and approved by the Commission." securities and must be registered with the Commission unless the issuer shows that the same is exempt from registration. Subsection 8.1 of the SRC mandates that "securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement Under the SRC, an evidence of indebtedness is considered

purpose of the provision of the SRC requiring the registration of securities is to afford public protection from investing in worthless securities. thus subject to public regulation.11 In the case of Herbosa vs. CJH Development Corporation,12 the Supreme Court emphasized that the Securities transactions are impressed with public interest and are

surrounding circumstances. The test is: the registration requirements prescribed under the SRC are applicable if the registrant or someone acting for the registrant intends a public offering or distribution of that registrant's securities.13 Whether a particular transaction involves a public offering depends on all the Relative thereto, it has been the position of the Commission that

members of a single company (not being the company offering its shares), or to the members of a few companies, or to the members of a particular profession, or to the investors in a particular class of companies, does not make it less an offer to the public." 14 person making the offer and the persons to whom the offer is made as friends, customers or co-adventurers, etc., or are the persons mere outsiders? If they are mere outsiders, the offer is made to the public; and in such case, the fact that the offer is made to a limited class, e.g., to the "Is there a sufficient subsisting connection between the company or the

under Subsection 9.1 of the SRC ("exempt securities") or to the sale of amount or limited character of the offering,15 i.e., the registration requirements shall not apply to any of the classes of securities listed all securities within the Philippines are subject to registration. However, the law recognizes and affords exemptions by reason of the small Thus, as a general rule, selling or offering for sale or distribution of

15 SEC Opinion addressed to Ms. Judith Philips, February 2, 1996. 11 Abacus Securities Corporation vs. Ampil, G.R. No. 160016, February 27, 2006. 13 SEC-OGC Opinion No. 09-04, Re: Registration of Securities, February 16, 2009. 10 Traders Royal Bank vs. Court of Appeals, G.R. No. 93397, March 3, 1997. 12 G.R. No. 210316, November 28, 2016. 14 Ibid

In the matter of BOT Lease and Finance Philippines, Inc. SEC En Banc Case No. 05-13-292 Page 8 of 11 DECISION

any security in any of the transactions enumerated under Subsection 10.1 of the SRC ("exempt transactions").

No. 6, s. 2021,17 provides: The 2015 SRC Rules,16 as amended by SEC Memorandum Circular

apply to the following: "9.1.2. The registration requirements shall not likewise

or quasi-banking shall be exempt from registration under Section 8.1 of the Code; institution that has been licensed by the BSP to engage in banking 9.1.2.1. Any evidence of indebtedness issued by a financial

its open market and/or rediscounting operations; 9.1.2.2. Evidence of indebtedness issued to the BSP under

through an organized market that is operated under the rules approved by the Commission; goods and services that are distributed and/or traded by banks or investment houses duly licensed by the Commission and BSP 9.1.2.3. Bills of exchange arising from a bona fide sale of

and containing among others; (1) information about the issuer funds established, administered, and supported by MFEs; Provided,thatthe circular/memorandum in a format prescribed by the Commission and the security to be issued, (2) information about the MFE, and (3) information about the guarantee; binding agreement to which the Philippines is a party or Multilateral Financial Entities or MFE), e.g., international financial institutions, multilateral development banks, development finance institutions or any other similar entities; or by facilities or financial entities established through a treaty or any other subsequently becomes a member (hereinafter referred 9.1.2.4. Any security issued or guaranteed by multilateral issuer shall file an offering as

likewise apply to evidence of indebtedness, e.g., commercial papers, that meet the following conditions: 9.1.2.5. The registration requirements shall not

institutional lenders: 9.1.2.5.1. Issued to not more than nineteen (19) non-

9.1.2.5.2. Payable to a specific person:

to maturity: and 9.1.2.5.3. Neither negotiable nor assignable and held on

17 SEC Memorandum Circular No. 6, s. 2021, Amendments on the SRC Rules 9 and 10, April 23, 2021. 16 2015 Implementing Rules and Regulations of the Securities Regulation Code, August 4, 2015.

In the matter of BOT Lease and Finance Philippines, Inc SEC En Banc Case No. 05-13-292 Page 9 of 11 DECISION

Fifty Million Pesos_(PhP150,000,000.00) or such higher amount as the Commission may prescribe. 9.1.2.5.4. In an amount not exceeding One Hundred

the provisions of the Code on civil and other related liabilities, and purchase, sale, distribution of such securities, settlement and Code and the rules issued thereunder. Moreover, the purchase and sale of such security shall not be exempt from the coverage of 9.1.3. Notwithstanding that a particular class of securities is exempt from registration, the conduct by any person in the other post-trade activities shall comply with the provisions of the other applicable provisions of the Code on fraud.

investors, the Commission, may require an Issuer of a class of securities exempted from registration, to make available to investors and file with the Commission periodic disclosures regarding the Issuer, its business operations, its financial condition, its governance principles and practices, its use of investor funds, and other appropriate matters, and may also provide for suspension and termination of such requirement with respect to such Issuer." (Emphasis and underscoring supplied) 9.1.4. Consistent with public interest and for the protection of

registered as their terms meet the conditions under Subsection 9.1.2.5 of of loan is an evidence of indebtedness which falls under the definition of between BOT Philippines and BOT Japan are not required to be the 2015 SRC Rules, as amended. "securities" under the SRC, the subject Loan Agreements executed by and On account thereof, this Commission holds that although a contract

payable to the parent corporation. They were neither negotiable nor assignable, and were held on maturity First, the loan was issued in favor of the subsidiary corporation and

BOT Japan, through the subject Loan Agreements represented money offered to the public, as defined in Subsection 3.1.17 of the 2015 SRC Rules.18 The loans obtained by BOT Philippines from its parent company, Second, the Loan Agreements were not offered and/or meant to be

information communication technology or any other forms of communication; or technology and other means of information distribution. whether solicited or unsolicited. Any solicitation or presentation of securities for sale through any of 3.1.17.1. Publication in any newspaper, magazine or printed reading material which is distributed 3.1.17.2. Presentation in any public or commercial place; 3.1.17.3. Advertisement or announcement on radio, television, telephone, electronic communications, 3.1.17.4. Distribution and/or making available flyers, brochures or any offering material in a public or commercial place or to prospective purchasers through the postal system, information communication 18 Supra, no. 9. Subsection 3.1.17. Public offering is any offering of securities to the public or to anyone, the following modes shall be presumed to be a public offering: within the Philippines;

In the matter of BOT Lease and Finance Philippines, Inc. SEC En Banc Case No.05-13-292 Page 10 of 11 DECISION

BOT Japan in BOT Philippines. Suffice it to state that the Loan Agreements any evidence or record to the contrary, the Loan Agreements are exempt from registration. borrowed by the former to carry out and further its business operations in the Philippines; the loan amount never became a capital investment by executed by BOT Japan and BOT Philippines are simple mutuum,19 which gave rise to an obligation on the part of the latter to pay the loan amount (plus stipulated interests) that it used for its business. In the absence of

satisfy isolated individual obligations need not be registered with the executing loan agreements instead of shares. The Loan Agreements, having been executed to enable BOT Philippines to obtain the needed that does not require to be registered with, or an exemption from the Commission. This finds support in the Gabionza Case where the Supreme Court held that negotiable or debt instruments issued or executed to Commission, to wit: between a parent company and its subsidiary, executed in relation to the business operations of the latter, no misrepresentation to the public could be attributed to, or deduced therefrom that will support a conclusion that these entities were circumventing the law by executing the debt instruments instead of shares. Neither could we deduce from the execution of the loan transactions that BOT Philippines was acting as an investment company that was sourcing funds from the public and funds for its operations from its parent, is a legitimate loan transaction Third, considering that the loan transactions were essentially

instead of stocks or traditional securities to evidence the towards maintaining the stability of the national investment market "This analysis is highly myopic and ignorant of the bigger picture. It is one thing for a corporation to issue checks to satisfy isolated individual obligations, and another for a corporation to execute an elaborate scheme where it would comport itself to the public as a pseudo-investment house and issue postdated checks investments of its patrons. The Revised Securities Act was geared

19 "Respondents' claims, as articulated in their testimonies before the trial court, cannot prevail over clear and leave no doubt upon the intention of the contracting parties, the literal meaning of its the clear terms of the document attesting to the relation of the parties. "If the terms of a contract are stipulations shall control." Articles 1933 and 1953 of the Civil Code provide the guideposts that determine if a contractual relation is one of simple loan or mutuum:

loan or mutuum." (Abella vs Abella. G.R. No. 195166; July 8, 2015) Art. 1933. By the contract of loan, one of the parties delivers to another, either something not consumable so that the latter may use the same for a certain time and return it, in which case the contract is called a commodatum; or money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid, in which case the contract is simply called a

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DOJ Resolution noted, ASBHI adopted this scheme in an attempt to circumvent the Revised Securities Act, which requires a prior license to sell or deal in securities. After all, if ASBHI's activities were actually regulated by the SEC, it is hardly likely that the design it chose to employ would have been permitted at all."2o against activities such as those apparently engaged in by ASBHI. As the

In view of the foregoing, the grant of the Appeal is in order.

hereby GRANTED. The Assailed Letter-Decision issued by the IPSD is hereby REVERSED AND SET ASIDE. dated 17 May 2013 filed by B0T Lease and Finance Philippines, Inc. is WHEREFORE, premises considered, the Memorandum on Appeal

SO ORDERED.

Makati City, Philippines.

EMILIO B. AQUINO Chairperson

JAVEY PAUL D.FRANCISCO Commissioner KELVIN LESTER K. LEE* Commissioner

KARLO|S. BELLO Commissioner MCJILL BRYANT T.FERNANDEZ Commissioner

*On Official Business

20 Gabionza v. CA, G.R. No. 161057, September 12, 2008.