SEC OGC Opinion No. 23-07: Secondary License

SEC OGC Opinion No. 23-07: Secondary License

On 09 May 2023, the Securities and Exchange Commission (“SEC”) issued SEC OGC Opinion No. 23-07, in which it was opined that a corporation intending to engage in marketing strategy involving the offering of medical value cards do not need to register for a secondary license. Briefly, the proposed strategy involves the distribution of medical value cards that will allow cardholders to avail of discounts in board and lodging, laboratories, medical procedures, and dental services of participating hospitals. 

The offering of the described medical value cards does not fall under the definition of securities under Section 3.1 of the Securities Regulation Code (“SRC”), specifically the offering of investment contracts. Under the SRC, securities are defined as: 

3.1. “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. It includes:

(a) Shares of stock, bonds, debentures, notes, evidences of indebtedness, asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a profit-sharing agreement, certificates of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates, voting trust certificates or similar instruments;
(f) Proprietary or non-proprietary membership certificates incorporations; and
(g) Other instruments as may in the future be determined by the Commission.

In Roberto Yupangco and Regina De Ocampo v. OJ Development and Trading Corporation, et. al., the Court reiterated the use of the Howey Test to determine whether or not an agreement is an investment contract, to wit: 

“xxx It requires the concurrence of the following for an investment contract to exists: (1) a contract, transaction, or scheme; (2) an investment of money; (3) investment is made in a common enterprise; (4) expectation of profits; and (5) profits arising primarily from the efforts of others.”

The SEC opined that two elements, that is, the expectation of profits and investment made in common enterprise, is not present in the proposed marketing strategy.

There is no expectation of profits since the strategy only gives a lifetime discount to the cardholders in board and lodging, laboratories, medical procedure, and dental services of the participating hospitals. The nature of investment contracts entails that a person seeks to use the money or property of others on the promise of profits. 

There is also no common enterprise since the “investors,” in this case, the purchasers, do not pool their investments,” i.e., the purchase price, in order to derive benefits or profits therefrom. 

Thus, for lack of concurrence of all the elements under the Howey Test, the proposed scheme cannot be considered an investment contract. Neither does the product fall under the other types of securities under the SRC. Consequently, a corporation that will engage in the business activity of offering these medical value cards will not require a secondary license from the SEC.