Grandtime Automobile, Inc.

Republic of the Philippines 1 3 SEC Building,EDSA,GreenhillsMandaluyong City Securities and Exchange Commission Department of Finance In the Matter of: GRANDTIME AUTOMOBILE INC. SEC-CDO CASE NO. 10-15-027 ENFORCEMENT AND INVESTOR PROTECTION DEPARTMENT, Movant. FOR: Issuance of Cease and Desist Order CEASE AND DESISTORDER of a Cease and Desist Order (Motion for CDO) in the verified Petition for Revocation Pending consideration before the Commission En Banc is a Motion for Issuance dated 6 October 2015 filed by the Enforcement and Investor Protection Department (EIPD) of this Commission against GRANDTIME AUTOMOBILE INC. (GTA). No. CS201508050.2 The primary purpose of GTA is [t]o engage in, carry on and Operate the business of DRIVING SCHOOL and other related services which may be GTA incorporated with the Commission on 24 April 2015 under SEC Registration deemed incidental to the purpose.3 The paid up capital of GTA is Php 312,500.00.4 FACTS GTA might be engaged in "an illegal form of multi-level marketing".5 In its Motion for CDO, the EIPD alleges that an anonymous caller claims that payment of a fixed entry feeof Php 1,200.00 when four (4 other persons are which provides for its marketing plans promising a payout of Php 12,000.00 after the recruited.6 As a result of which, the EIPD alleges it viewed the Facebook page of GTA Finance Department (CGFD issued a certification to the effect that GTA is not a On 14 July 2015,upon request from the EIPD,the Corporate Governance and 5 Id., par. 5. 2 Id., par. 1, Annex A(Certificate of Incorporation of GTA). 3Id.par.2,Annex ASecond Article of the Articles of Incorporation 6. Id., par. 6. Motion for CDO filed on 09 October 2015. 4Id., par.3, AnnexAEight Articles of the Articles of Incorporation). SEC CDO Case No.10-15-027 Page 2 of 8 In the matter of: Grandtime Automobile Inc. registered issuer of securities under Sec. 8 and 12 of the Securities Regulation Code SRC) and is not licensed to offer or sell securities to the public.8 On 23 July 2015, the investigating team of the EIPD executed a Field Investigation Report stating that it proceeded to the principal office of GTA to conduct an tarpaulin featuring "different sports cars and luxury cars with words advertising earning ocular inspection.9 During the ocular inspection, the investigating team noticed a opportunity" outside the building of the office of GTA. Thereafter, Pastor Carlos Nabata introduced himself as one of the Team Leaders to the investigating team and provided a presentation on the business scheme of GTA. He explained that there are four (4 parts of GTA which a joining member may activate his account, namely:i)Jumpstartwith an entry fee of Php 1,500.00;iiBooster with an entry fee of Php 1,800.00;iii Main Turbowith an entry fee of Php 13,500.00;and(ivVIP Nitro,with an entry fee of Php 50,000.00. He further stated that each of the four 4 parts has three 3 laps.To graduate or "exit each lap, the seven positions must be filled up. In other words, the joining member must enroll two (2) partners and such partners must bring in two (2) partners. Below is an illustration of the foregoing: The Recruit of the Joining Member's Partner Joining Partner Member's The.Recruitofthe Partner Joining Member's Joining Member The Recruit of the Joining Member's Partner Joining Partner Member's The Recruit of the Joining Partner Member's Moreover, for each direct referral of the partner, the member receives an incentive, the amount of which varies depending of the lap and part of GTA he is enrolled in (e.g. direct referral commission in the amount of Php 1,500.00 is given to the member who is enrolled in the Ist lap of VIP Nitro). The member receives an additional Once all seven positions are filled, the member advances to the 2nd lap of the respective commission when his partner refers an additional partner (e.g. commission in the amount of Php 48,500.00 is given to the member who is enrolled in the 1st lap of VIP Nitro). lap and shall receive an exit bonus". Further, the member will automatically enter the 2nd lap and shall pay an entry fee, which will be deducted from his commissions he earned from the Ist lap. Lastly, it must be noted that the member may be entitled to the amount of Php l,390,000.00,which is considered as the total payout after completing the 3rd lap in the VIP NITRO. On 24 August 2015, the EIPD alleges that it issued a Notice of Conference on the officers of GTA directing them to appear before the latter on 3 September 2015.10 However,the said officers of GTA failed to appear on date of the conference. Thereafter Id.par. 11,AnnexCGFD's Certification dated 25 February 2015 10 Id., par. 18. 7Republic Act 8799 (2000) 9 Id., Annex "B Page 3 of 8 In the matter of: Grandtime Automobile Inc. SEC CDO Case No. 10-15-027 the said officers again failed to appear after being given another chance to appear by the EIPD. Afterwards, the EIPD filed a Supplement to the Motion for [CDO] attaching a Certification from the Markets and Securities Regulation Department (MSRD).!1 The Certification stated that GTA has not been issued a Certificate of Registration or Licenses to act as Broker and/or Dealer in Securities, Dealer in Government Securities, Investment Adviser of an Investment Company, Investment House, Transfer Agent. The MSRD further certified that GTA is not, under any circumstance, authorized or licensed to engage in activities and/or solicit investments necessarily connected with or incidental to the pursuit of and carrying on said business or profession which are required to secure certificates of registration/licenses from the Commission.12 Hence, the filing of this Motion for CDO. ISSUE Whether the issuance of a CDO is justified in this case. RULING Concept of securities and investment contract Securities are shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instrument, whether written or electronic in character"13 It includes an investment invests his money in a common enterprise and is led to expect profits primarily from the contract,14 which is defined as a contract, transaction, or scheme whereby a person whenever a person seeks to use the money or property of others on the promise of efforts of others.i5 A presumption that a contract is an investment contract arises profits.16 Elements of an investment contract Commission,17 the Supreme Court stated that an investment contract in our jurisdiction, to In Power Homes Unlimited Corporation v. Securities and Exchange be a security subject to regulation by the Commission, must be proved to be (1 an investment of money,2 in a common enterprise,3) with expectation of profits,4 primarily from efforts of others. 12 Id, Annex "A" (Certification of the MSRD dated 9 November 2015). 13 Section 3.1., SRC. 15 SRC Rule 3(1)(G), Amended Implementing Rules and Regulations of the SRC. 11 Supplement to the Motion for CDO dated 4 January 2016 and filed on 8 January 2016. 14 Section 3.1.(b), Id. 17 G.R.No.164182,26 February 2008. IO Id. In the matter of: Grandtime Automobile Inc. SEC CDO Case No.10-15-027 Page 4 of 8 In the case at bar, the investment scheme of GTA constitutes an investment contract considering all four (4) elements of an investment contract are present. As to the first element, an investment of money occurs when an investor commits money to an enterprise or venture in a manner that subjects himself to financial loss.18 In the instant case, as stated by Pastor Carlos Nabata and as provided for by the flier of GTA, there are four (4parts of GTA a joining member can choose from, namely: "Jumpstart, with an entry fee of Php 1,500.00; (iiBooster, with an entry fee of Php 1,800.00;iiiMain Turbowith an entry fee of Php 13,500.00;and ivVIP Nitro with an entry fee of Php 50,000.00. In fact, there is no evidence indicating that GTA money when the joining member avails of any of the four (4) parts of GTA by the payment of the entry fee. does not provide driving lessons Incorporation for the entry fees paid by its members. pursuant to its primary purpose in its Articles of Clearly, there is an investment of As to the second element, there is a common enterprise. To reiterate, a common enterprise is deemed created when two 2 or more investors pool their resources. Several tests have evolved to determine what constitutes "common enterprise" 19 One of these tests is the horizontal commonality approach. Under this test, the determination of whether a transaction satisfies the commonality element of the modified Howey test involves an inquiry into whether the said transaction involves the joint participation of more than one investor in (i) the investment of funds or (ii) the sharing of profits.20 Furthermore, joint participation by investors in the same investment enterprise, achieved by pooling the invested funds for a common purpose, is required in order to satisfy the common enterprise element.21 In the case at bar, a common enterprise exists since there is a joint participation by by the flier of GTA, at the principal office, in order to graduate or exitfrom each lap of any of the four (4) parts of GTA, the seven (7) positions in each table must be filled up. The positions are filled up when the member enrolls" or recruits two (2) partners. the members and their referrals. As stated by Pastor Carlos Nabata and as provided for Such partners must then enroll or recruit two 2 additional partners. Clearly,there is a pyramid scheme22 that exists in GTA, which indicates the pooling of funds in a common enterprise. 21 Id., citing Wasnowic v. Chicago Bd. of Trade 352 F Supp 1066. 22 People v. Balasa, G.R. Nos. 108601-2 (1998), in citing the Consumer Act of the Philippines (RA 7394), 18 SEC v.International Mining Exchange,Inc.,515 F.Supp.1062 20 Id., citing 69 Am Jur 2d citing Stenger v. R.H. Love Galleries, Inc. 741 F2d 144. 19 In the Matter of Octopus Network, Inc.,SEC-PED Case No.98-2220,22 May 1998. defines a pyramid scheme as a sales devices whereby a person, upon condition that he makes an additional persons who will also be granted such right to recruit upon condition of making similar investment, is granted by the manufacturer or his representative a right to recruit for profit one or more investments: Provided, That,the profits of the person employing such a plan are derived primarily from and credit; Provided, further, That the limitation on the number of participants does not change the the recruitment of other persons into the plan rather than from the sale of consumer products, services nature of the plan. Page 5 of 8 In the matter of: Grandtime Automobile Inc. SEC CDO Case No. 10-15-027 As to the third element, there must be an expectation of profits. By profits, the court has meant either capital appreciation resulting from the development of the initial investment, or participation in earnings resulting from the use of investors' funds. In such cases, the said investors are attracted primarily by the prospects of a return on his investment.23 In this case, the members avail of the packages with the view of receiving profits as much as Php 1,390,000.00 from GTA.In other words,the members flocked to GTA primarily for the income opportunity. Lastly,as to the fourth element, there must be the expectation of profits primarily from the efforts of others. In this case, the operations and management rests upon GTA and the members do not participate in such operations or management thereof. Clearly,GTA is engaged in the sale or offering for sale or distribution within the Philippines of securities, i.e., investment contracts, based on the statements made by Pastor Carlos Nabata, and based on the information provided in the flier of GTA. Requirement of the registration of securities or distribution within the Philippines, without a registration statement duly filed with and Section 8.1 of the SRC provides that securities shall not be sold or offered for sale that all securities required to be registered under Section 8.1 shall be registered through approved by the Commission. In connection therewith, Section 12.1 of the SRC states the filing by the issuer in the main office of the Commission, of a sworn registration statement with respect to such securities, in such form and containing such information and documents as the Commission shall prescribe. As securities, the investment scheme of GTA must be registered being offered or sold to the general public, in compliance with Sections 8.1 and 12.1 of the SRC provided at its principal office, constitutes a public offering under the Amended In the instant case, the presentation of Pastor Carlos Nabata and the flier of GTA Implementing Rules and Regulations of the SRC,24 viz - general to anyone who will buy, whether solicited or unsolicited. "Public offering means a random or indiscriminate offering of securities in soliciatation or presentation for sale through any of the following modes A shall be presumed to be a public offeringx x x ji. Presentation in any public or commercial place iv. Distribution and/or making available flyers, brochures or any offering purchasers.x x x" (Emphasis ours) material in a public or commercial place._or mailing the same to prospective 24 SRC Rule 3(1)(N), Amended Implementing Rules and Regulations of the SRC. 23 Power Homes Unlimited Corporation v. Securities and Exchange Commission. Page 6 of 8 In the matter of: Grandtime Automobile Inc. SEC CDO Case No.10-15-027 Anent thereto, the Certification issued by the MSRD clearly shows that GTA is not registered issuer of securities pursuant to Sections 8.1 and 12.1 of the SRC, and therefore, not licensed to issue or offer securities to the public. From the foregoing, there is substantial evidence to show that GTA is engaged in the sale and offer of securities, in form of investment contracts, without the proper registration. Justification for the issuance of CDO Consequently, the issuance of the CDO is justified pursuant to Section 6425 of the SRC since the scheme offered by GTA will operate as a fraud on investors or likely to cause grave or irreparable injury. The Supreme Court, in a case, held that a transaction similar to the case at hand is not a legitimate investment strategy but a gullibility scheme, which works only as long as there is an ever increasing number of new investors joining the scheme.In fact,the paid up capital of GTA is only Php 312,500.00 while the total payout to an investor for the 3rd lap in the VIP Nitro is Php 1,390,000.00. In which case, it is difficult to sustain over a long period of time because GTA needs an ever larger pool of later investors to continue paying the promised profits to early investors. The idea behind this type of swindle is that the "con-man" collects his money from his second or Necessarily, these schemes only last weeks or months at most.26 Hence, the issuance of third round of investors and then absconds before anyone else shows up to collect. the CDO is justified. WHEREFORE, premises considered, GRANDTIME AUTOMOBILE INC. its partners, officers, directors, agents, representatives, conduits, assigns, AND ANY AND ALL PERSONS CLAIMING AND ACTING FOR AND IN THEIR BEHALF are hereby ordered to IMMEDIATELY CEASE AND DESIST27, UNDER PAIN OF approved by the Commission and the corresponding to offer/sell is issued. the form of investment contracts or any others of the same nature, as discussed in this Cease and Desist Order, until the requisite registration statement is duly filed with and CONTEMPT, from engaging in activities of selling and/or offering for sale securities in Furthermore, the subject corporation is directed to cease its internet presence relating to above-stated investment activities. The Commission will institute the appropriate administrative and criminal action against any persons or entities found to act as solicitors, information providers, salesmen, agents, brokers, dealers or the like for and in behalf of the subject corporation. 25 Section 64.1., SRC. The Commission, after proper investigation or verification, motu propio, or upon verified complaint by any aggrieved party,may issue a cease and desist order without the necessity of a 26 People v.Romero, et al., G.R.No. 112985,21 April 1999 27 Section 64.1, SRC, The Commission, after proper investigation or verification, motu propio, or upon or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public. verified complaint by any aggrieved party, may issue a cease and desist order without the necessity of a prior hearing if in its judgment the act or practice, unless restrained, will operate as fraud on investors or is otherwise likely to cause grave or irreparable injury or prejudice to the investing public. prior hearing if in its judgment the act or practice, unless restrained, will operate as a fraud on investors Page 7 of 8 In the matter of: Grandtime Automobile Inc. SEC CDO Case No.10-15-027 The Enforcement and Investor Protection Department of the Commission is hereby DIRECTED to: l) serve this Order to GRANDTIME AUTOMOBILE INC.,its President, General Manager, Corporate Secretary, Treasurer, In-House Counsel or partners; 2)post copies of the Cease and Desist Order Order at the entrance of the main office and/or branches,if any,of GRANDTIME AUTOMOBILE INC Let a copy of this Cease and Desist Order be also posted in the Commission's website; published in a national newspaper of general circulation and furnished to the Markets and Securities Regulation Department, Company Registration and Monitoring Department, the Corporation Finance Department and the Economic Research and Information Department of the Commission for their information and appropriate action. The Enforcement and Investor Protection Department of the Commission is hereby FURTHER DIRECTED to submit a FORMAL COMPLIANCE REPORT, by way of a pleading, to the Commission En Banc WITHIN FIVE (5) DAYS from receipt of this Cease and Desist Order. In accordance with the provisions of Sec. 64.328 of SRC and Sec. 10-3 of the 2006 Rules of Procedure of the Commission, the parties subject of this Cease and Desist Order may file a request for the lifting thereof within five (5 days from receipt hereof. FAIL NOT UNDER PENALTY OF LAW. SO ORDERED. Mandaluyong City;26 January 2016 CC TERESITA J. HERBOSA Chairperson anida Moute MANU OB.GAITE ANTONIETA F.IBE Commissioner Commissioner 1 * EPHYRO LUIS B.AMATONG Commissioner BLAS JAMES G.VITERBO Commissioner days from receipt of the order, file a formal request for a lifting thereof. Said request shall be set for hearing 28 SRC, Section 64.3. Any person against whom a cease and desist order was issued may, within five (5) request within the time herein prescribed, the cease and desist order shall automatically be lifted. by the Commission not later than fifteen (15) days from its filing and the resolution thereof shall be made not later than ten (10) days from the termination of the hearing. If the Commission fails to resolve the * On Official Business Page 8 of 8 In the matter of: Grandtime Automobile Inc. SEC CDO Case No.10-15-027 COPY FURNISHED: Company Registration and Monitoring Department SEC Building,EDSAGreenhills 2nd Floor, Securities and Exchange Commission Mandaluyong City, Metro Manila Philippines Mandaluyong City, Metro Manila Philippines SEC Building, EDSA,Greenhills Corporate Governance Finance Department 11th Floor, Securities and Exchange Commission Markets and Securities Regulation Department Mandaluyong CityMetro Manila Philippines 6th Floor, Securities and Exchange Commission SEC Building, EDSA,Greenhills Economic Research and Training Department Mandaluyong City,Metro Manila Philippines SEC Building, EDSA, Greenhills 1oth Floor, Securities and Exchange Commission Information and Communication Technology Department 7th Floor, Securities and Exchange Commission SEC Building,EDSA,Greenhills Mandaluyong City,Metro Manila Philippines