Attys. Kennedy B. Sarmiento and JE Froilan M. Clerigo

January 2, 1997 Attys. Kennedy B. Sarmiento and JE Froilan M. Clerigo Britanico Consunji & Sarmiento Law Offices 2nd Flr., Dacon Building, 2281 Pasong Tamo Extension 1231 Makati City, Metro Manila Gentlemen : This refers to your letter dated December 17, 1996, requesting for and in behalf of your client, Hutchinson & Co. Trust Company Ltd., the declaration by the SEC that the " vacation ownership " in Royal Goan Beach Club, a luxury resort complex in Goa, India, to be issued by your client is an exempt security under the Revised Securities Act. LexLib As, stated, the " vacation ownership " gives the purchaser future holiday accommodation in the above-mentioned Club for one (1) specific week of a year for a definite period of eighty (80) years. It is your contention that the scheme does not involve financial investment as the money imparted would be merely employed in the purchase of a future right to the use of certain facilities of the Club and the purchaser does not expect to secure income or profit therefrom. Thus, you believe that the purchasers are not considered as investors, and therefore there is no need to register the same under the Revised Securities Act because there are no investors to protect. Furthermore, the move of the SEC in proposing for legislative amendments to the Revised Securities Act which include, among others, the exclusion from the present definition of the term " securities " of any form of contract where there is no expectation of profitable return of investment is an indication that registration of said contracts is not necessary. Hence, your present request. The Commission, on several occasions, has ruled that while " contracts for future services " are not strictly considered "investment contracts" as there is no expectation of profitable return, nevertheless it falls within the definition of "securities" as defined under the present Revised Securities Act (RSA) as they are essentially contracts involving outlay or employment of money on the assumption and anticipation of "future enjoyment of a privilege" . The RSA, provides thus: (a) " Securities " shall include bonds, debentures, notes, evidences of indebtedness, shares in company, preorganization certificates or subscriptions, investment contracts, certificates of interest or participation in a profit sharing agreement, collateral trust certificates, equipment trust certificates (including conditional sale contracts or similar interests or instruments serving the same purpose), voting trust certificates, certificates of deposit for a security, or fractional undivided interest in oil, gas or other mineral rights, or in general, interests or instruments commonly considered to be "securities", or certificates of interests or participation in, temporary or interim certificates for, receipts for guarantees of, or warrants or rights to subscribe to or buy or sell any of the foregoing; or commercial papers evidencing indebtedness of any person, financial or non-financial entity, irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another, with or without recourse, such as promissory notes, repurchase agreements, certificates of assignments, certificates of participation, trust certificates or similar instruments, or proprietary or non-proprietary membership certificate, commodity futures contracts, transferable stock options, pre-need plans, pension plans, life plans, joint venture contracts, and similar contracts and investment where there is no tangible return on investments plus profits but an appreciation of capital as well as enjoyment of particular privileges and services . "(Emphasis supplied) Accordingly, since the scheme described above involves availment of "future services ", no contracts pertaining thereto shall be offered to the public within the Philippines, without having them registered with and/or licensed by the Securities and Exchange Commission pursuant to the provisions of the Revised Securities Act, unless exempted by the Commission pursuant to Section 6(b) of the same law. While it is true that under the proposed Securities Regulation and Enforcement Act, the exclusion from the definition of "securities" of any form of contract where there is no expectation of profitable return of investment has been proposed, such form of contract, which is more of a nature of a "pre-need" plan is still covered under Chapter III (Sec. 12) of the proposed legislation. Hence, in the event the proposed legislation is enacted into a law, it is still subject to registration/regulation by the SEC. Otherwise, if not regulated, it would open to a floodgate of investment promoters who are capable of adopting ingenious investment schemes of what purport to be simple contracts of sale of future services to evade regulation by the SEC. While the contract executed under the above scheme is not strictly considered " an investment contract for profit ", the same involves commitment of money payment from the public purchasers, and like any other form of investment, the holders of the contract are also entitled to protection. On whether the above-described scheme can be exempted on grounds allowed under Section 6(b) of the RSA, we regret to inform you that the reasons stated in your letter are not sufficient to justify the exemption as it fails to state the actual amount involved in the proposed transaction and number of persons being offered by the product. Thus, unless it can be clearly shown that the offering of the vacation ownership contract is of limited character and the amount involved is small such that registration under the Revised Securities Act is not necessary in the public interest and for the protection of the offerees, the Commission cannot grant exemption to the transaction described in your letter. (SGD.) PERFECTO R. YASAY, JR. Chairman