Published 26 August 2019, The Daily Tribune

Scams are disguised as extremely profitable ventures with hardly any risk. Not a few have fallen to the promise of higher returns for a shorter period than those offered by banks and other traditional financial institutions.  Indeed, recent unfortunate events have taught potential investors that when presented with such opportunity, the better approach is to think long and hard before diving in.

A typical investment scam involves the sale or distribution of investment contracts, or a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits primarily from the efforts of others. The test is whether in the agreement, the person receiving the money seeks to use the money or property of others on the promise of profits.

The Securities Regulation Code (SRC) requires the registration of securities, which are shares, interest, or participation of investors in an enterprise which gives rise to an expectation of profits primarily derived from the efforts of others. Securities shall not be sold or offered for sale or distribution without a registration statement duly filed and approved by the SEC.

Aside from involving unregistered securities, a scam also typically employ what is commonly known as a Ponzi scheme, the key features of which are impossibly high returns. These returns are sourced from money contributed by other investments from new and unsuspecting investors. Such scheme is a prohibited fraudulent transaction under Section 26.3 of the SRC, consisting of engaging in any act, transaction, practice, or course of business which operates or would operate as a fraud or deceit upon any person.

The SRC does not limit itself to prohibiting the unauthorized sale or offer of unregistered securities and/or engaging in fraudulent transaction. Under Section 28, only those brokers, dealers or salesmen of such securities duly registered with the SEC can engage in the business of buying or selling securities in the Philippines. Those who offer such securities without being duly licensed by the SEC may be criminally punished.

This provision requiring the registration of persons engaging in the sale or offering of such securities is paramount in ascribing liability in the event that an erring corporation or organization folds and its key officers disappear.

To illustrate, in the case of Securities and Exchange Commisison vs. Oudine Santos (G.R. No. 195542, March 19, 2014), the SEC was riddled with  complaints from thirty–one (31) individuals against a corporation including its directors, officers, employees, agents and brokers, which had promised sky-high returns to its investors, in violation of certain provisions of the Securities Regulation Code, including Section 28 thereof. The head of the corporation had gone missing and with it the monies and investment of a significant number of investors. The respondent was charged in the complaints in her capacity as investment consultant of the corporation who supposedly induced private complainants to invest their monies.

The high court observed that the transactions involved were investment contracts or participation in a profit sharing agreement that fall within the definition of the law. When the investor is relatively uninformed and turns over his money to others, essentially depending upon their representations and their honesty and skill in managing it, the transaction generally is considered to be an investment contract.The touchstone is the presence of an investment in a common venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.  In such instance, the same constitute securities which must be duly registered with the SEC essentially for the protection of the investors and the general public.

The Supreme Court also found that respondent’s active recruitment and referral of possible investors to the corporation give rise to probable cause to indict her for the charge. The fact that respondent did not sign the investment contracts is of no moment given that the same document the act performed by respondent, as it is merely a scheme to circumvent and evade liability should the pyramid fall apart.

Not all investment opportunities are fraudulent, but it also pays well to remember that scams do exist, and they had driven many well-meaning investors to penury. At the end of the day, a simple yardstick can be used after due diligence is conducted: if the scheme is too good to be true, it usually really is.

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