Definition of Securities; Investment Contract

April 12, 2011 SEC-OGC OPINION NO. 21-11 DEFINITION OF SECURITIES; INVESTMENT CONTRACT Atty. Arthur C. Corpuz President i-Share Club, Inc. Unit 1024-1025 10/F City & Land Megaplaza, ADB Avenue corner Garnet Road, Ortigas Center, Pasig City 1605 Sir : This refers to your letter dated 10 January 2011 requesting our legal opinion on whether i-Share Club, Inc. ("i-Share") needs to secure from the Commission a secondary license for its contemplated business/activity. Your letter-request for opinion dated 9 November 2010 addressed to Director Justina F. Callangan was endorsed to this Office on 22 December 2010. It stated that i-Share operates an online social networking site where members enroll for free to enjoy the advantages of a social media site. Also, the letter stated that for a monthly fee of one hundred ninety-nine pesos (P199.00), the members will have their own online virtual business office, and get to enjoy the following: 1. Income opportunities such as discounts and points for patronizing i-Share's business tie-ups. The points have monetary value which will be spread and shared among i-Share members based on the company's sharing plan; 2. Shopping at the i-Share website, e-mail, cellular phone loading, bills payment, airline ticketing and hotel booking, member-to-member money transfer, online advertising; 3. Insurance coverage and savings to be subsidized by the company; 4. Two percent (2%) of the member's income will be donated to charity and substantial amount of the company's income will also go to charity and other projects to elevate the socio-economic standing of the members of i-Share. To increase their earning capacity, members can upgrade their membership status by paying one thousand nine hundred and ninety-nine pesos (P1,999.00). The members also get a marketing kit containing a USB baller band, tin can, point values and brochures when they upgrade their membership. IDCcEa I-Share's query is whether it needs to secure a special or secondary license based on the foregoing. This is based on whether or not i-Share activities involve a "security". The Securities Regulation Code 1 ("SRC'), Section 3.1 defines "securities" as "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. It includes: . . . (b) Investment contracts, certificates of interest or participation in a profit sharing agreement, certificates of deposit for a future subscription; . . ." An investment contract has four components: 1. Investment of money 2. Common enterprise 3. Expectation of profits 4. Profits arise primarily from the efforts of others Under the Terms of Service, joining i-Share is free. In your letter dated 10 January 2011, you clarified that i-Share will no longer charge the previously stated P199 monthly fee. The P1999.00 fee for upgrading membership is for the purchase of a premium business kit. This cannot be considered an investment of money because it is in fact a sale of goods and/or services included in the premium business kit, which includes the i-Share visa card, USB baller band, gift certificates from partner establishments, among others. By the absence of an investment of money alone, it can no longer be considered an investment contract. We are thus of the opinion that i-Share does not need to obtain a secondary license for this contemplated business/activity. However, another matter has come to our attention. We sent you a letter dated 9 March 2011 requesting clarification on some features and services that will be offered to members of i-Share Club as shown on i-Share website (www.ishareinternational.com) . We referred in particular to the "i-Invest" service/feature by which a member can "own a business through online purchase." Your letter dated 14 March 2011 stated that the i-Invest service/feature "seeks to provide additional income opportunities to i-Share Members who wish to contribute to the completion of a certain project such as convenient store, medical or car clinic etc. In return, i-Share members who contributed in a certain project will get a corresponding share in the profit of such project." At first glance, this activity of your corporation seems to involve securities, as this would fall under the definition of a security called an investment contract. This would necessitate the registration of the investment contract, as mandated by Section 8 2 of the SRC. This would also be outside the scope of the corporation's primary purpose as laid out in i-Share's Articles of Incorporation, that states that the primary purpose of the corporation is "[t]o engage in the business of distributing goods particularly wellness products and providing services using state of the art technology." Section 3.1 (G) of the Implementing Rules and Regulations ("IRR") of the SRC defines an investment contract as: IaHDcT ". . . a contract, transaction or scheme (collectively "contract") whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. 1. An investment contract is presumed to exist whenever a person seeks to use the money or property of others on the promise of profits. 2. A common enterprise is deemed created when two (2) or more investors "pool" their resources, creating a common enterprise, even if the promoter receives nothing more than a broker's commission." Again we quote the pertinent part of your letter dated 14 March 2011: "The i-Invest is a module within the entire i-Share concept which seeks to provide additional income opportunities to i-Share Members who wish to contribute to the completion of a certain project such as convenient store, medical or car clinic etc. In return, i-Share members who contributed in a certain project will get a corresponding share in the profit of such project." (Emphasis supplied.) The i-Invest concept would thus involve an investment contract, as it has all of the elements of one. The investment contracts involved in this contemplated business activity would need to be registered with the Commission. However, in your 14 March 2011 letter, you also stated that i-Invest is not yet functional, and that a separate company will cater to this if and when this feature is open. Since it will not be i-Share that will accomplish the i-Invest activities, i-Share does not need to secure a secondary license for this purpose. We must emphasize, however, that if and when this investment activity will be undertaken, the investment contract that embodies the venture must be registered with the Commission before the corporation begins to sell the securities. Otherwise, the corporation may become liable for a violation of the SRC and would be penalized accordingly. Your website also showed an "i-Cash" service/feature that is a "member-to-member online money transfer using your i-Share issued ATM card." However, you clarified in your letter dated 14 March 2011 that it is a facility powered by Bancnet, with which a member can use Bancnet facilities to make online money transfers to fellow i-Share members, and that usual Bancnet charges apply without any additional income for i-Share. As it is not really i-Share conducting the banking process but Bancnet, thus, no secondary license from the Commission is required for i-Cash service/feature. You stated in your letter that this feature is not yet in operation, as the integration between the i-Share and Bancnet systems is still pending completion. We advise, however, that before i-Cash becomes operational, i-Share should seek the opinion of the Bangko Sentral ng Pilipinas regarding i-Cash, particularly the issuance of ATM cards by i-Share and the online money transfer service, as it is BSP that regulates these banking activities. This Opinion is based solely on the facts disclosed in the query and relevant solely to the particular issues raised therein. It shall likewise be understood that the foregoing shall not be used in the nature of a standing rule binding upon the Commission in other cases or upon the courts. If, upon investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered void. Please be guided accordingly. HIAcCD (SGD.) VERNETTE G. UMALI-PACO General Counsel Footnotes 1. Republic Act No. 8799 (2000). 2. SEC. 8. Requirement of Registration of Securities. 8.1. Securities shall not be sold or offered for sale or distribution within the Philippines, without a registration statement duly filed with and approved by the Commission. Prior to such sale, information on the securities, in such form and with such substance as the Commission may prescribe, shall be made available to each prospective purchaser.