Lopez, Agravante and Company

June 26, 1990 Lopez, Agravante and Company Suite 502, Pacific Bank Bldg. Ayala Ave., Makati, Metro Manila Gentlemen : This refers to your letter dated January 24, 1990 requesting opinion regarding customers' deposits which appear as a liability account in the financial statements' presentation of your client. prcd You alleged that your client is mainly involved in the direct selling of consumer products (i. e. cookwares and houseware items) through the party-plan system and door-to-door selling techniques. Among the various payment terms is the "term-payment scheme" or the so called "lay-away" plan with the following mechanics: 1. Term payment comes in 2, 3, 6, 9 and 12-month options, with no interest but subject to the 20% minimum deposit policy. 2. Under the sales contract signed between the buyer and the seller (i.e. the company), the goods shall be delivered by the seller to the buyer only after they have been fully paid in all modes of payment . 3. The seller commits itself to protect the buyer against any price increase once the deposit or initial payment is received. Changing of order is allowed only if the value of the new order is not less than the previous order based on current prices and the new order falls under the same product classification. Your queries are: 1. Whether or not the liability account is covered under the SEC Rules and Regulations requiring the registration of short or long-term commercial papers; and 2. If there are other pertinent regulations of the SEC that would affect such transaction. While the transaction is not covered under the SEC "Rules on Registration of Commercial Papers" , the same falls within the definition of "securities" under the Revised Securities Act (Batas Pambansa Blg. 178). The law has expanded the meaning of securities to include contracts and investments even where there is no tangible return of investments but an appreciation of capital as well as enjoyment of particular privileges and services. Section 2(a) of the Law provides thus: Definitions For purposes of this Act: (a) "Securities" shall include . . . proprietary or non-proprietary membership certificates, commodity futures contracts, transferable stock option, pre-need plans, pension plans, life plans, joint venture contracts and similar contracts and investments where there is no tangible return of investments plus profit but an appreciation of capital as well as enjoyment of particular privileges and services . "(emphasis supplied) The present definition of "securities" in the Revised Securities Act is designed to embrace speculation schemes and includes contracts for future delivery of goods or services of every kind, character and description as can be construed from the phrase "and similar contracts". The term was redefined and broadened to prevent evasion of the ingenuity of promoters who adopt to be a simple bill of sale of goods or services . In the above-mentioned scheme, the company is engaged in the selling of future interest which is represented by the sales contract. What is being sold really is the contract representing an interest in a future delivery of the goods. While it is not considered an investment contract as there is no expectation of profitable return, it essentially involves money outlay on the assumption and anticipation of future delivery of property . The scheme of operation described above, therefore, falls within the scope of securities" contemplated by the Revised Securities Act. Thus, under the "SEC Revised Rules on Registration and Sale of Pre-Need Plans, Pension Plans, Life Plans, and Similar Contracts and Investments", the transaction is included within the scope of "contracts" subject to registration and licensing . The said SEC Revised Rules provides: "SECTION 1. Scope . These rules shall apply to the following: (b) Contracts covering the sale of some form of property on installment which provide for an initial payment and monthly or annual payments which are deposited towards the purchase of such property which shall be delivered in the future." (Emphasis supplied) LexLib Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman