Legal Issues on High-yield Investment Schemes in The Philippines


Makes an investment of money  in a common enterprise with the expectation of profits to be derived solely from the efforts of others.

HIGH-yield investment schemes are a hot topic nowadays in the Philippines. Various entities have successfully enticed not only Filipinos both in the Philippines and abroad but even foreigners to get into these get rich quick scheme which offers rate of returns from 30 percent per month to as high as 400 percent per month!

This burning issue (which has become a big headache for the Philippine government) is multifaceted as it has not only legal implications. The problem is multifaceted, as it is also an investment, business, economic and even a theological problem! Why is it a theological problem that needs to be addressed? I will explain this later in the next series of articles. As a pastor, lawyer, businessman and personal finance and investment professional this is my take on this matter. We will tackle the legal perspective first.

Republic Act 8799 otherwise known as the “Securities Regulation Code” (SRC) prohibits the sale or distribution of “securities” in the Philippines without first registering it with the Securities and Exchange Commission (SEC). After such securities are registered a “Secondary License” is issued. So what are securities as defined under the SRC? Under Section 3, securities are defined as “shares, participation or interests in a corporation or in a commercial enterprise or profit-making venture and evidenced by a certificate, contract, instruments, whether written or electronic in character. It includes among others… Investment contracts, certificates of interest or participation in a profit-sharing agreement, certifies of deposit for a future subscription.”

The high-yield investment schemes that are being peddled to the public very well falls under the definition of securities according to the Securities Regulation Code as these are “investment contracts” and or “profit-sharing agreements.” In short, these schemes are considered securities and before such will be offered to be public, the entities offering them must first acquire a secondary license from the SEC.

So why are high-yield investment schemes now being tagged as scams when the entities offering them do not even call what they are offering as “investments”? In several cases the Supreme Court of the Philippines has used what is known as the “Howey Test” to properly answer this question (Borrowed from the United States Supreme Court case of SEC vs W.J Howey Co.)

According to the Supreme Court of the Philippines, a scheme is an investment contract (regardless of what it is called) if it:

Makes an investment of money  in a common enterprise with the expectation of profits to be derived solely from the efforts of others. (primarily for the efforts of others)

The Howey test has been applied by the SEC in revoking the registration of one of these entities offering a high-yield investment scheme. Citing the Supreme Court’s decision in the case of Power Homes Unlimited Corp. vs  SEC (G.R No. 164182, 28 February 2008) The SEC en banc revoked KAPA Ministry International Inc.’s certificate of registration and concluded that it has deceived the public by offering, selling and transacting unregistered “securities” without the necessary secondarily license from the SEC. According to the SEC en banc:

“The EIPD contends that Kapa’s investment scheme falls within the ambit of an investment contract…That Kapa’s investment scheme which it calls as a donation is the contract entered into by the member-investor. There is placement of money for which the member-investor is promised an interest of 30 percent of the amount donated per month for life. The money invested is placed in a common enterprise and the member-investor expects to derive profits. Lastly the member-investors expect to earn profits from the entrepreneurial and managerial efforts of others. The member-investors need not do anything other than invest money and go to the office of Kapa to receive the monthly profits promised to them…KAPA in engaging itself in offering/selling securities in the form of investment contrast with the necessary permit/registration under Section 8.1 of the SRC commits an ultra vires act exceeding the privilege granted to it. KAPA misrepresents itself to the public by concealing this investment scheme in the guise of a donation to entice the public to “donating” when in truth and, in fact, they are investing. It is by these acts that Kapa’s Certificate of Corporate Registration should be revoked so that it can no longer perpetuate its fraudulent and misleading acts through the privilege granted to it by the State.”

Therefore in a nutshell, it does not matter what kind of animal you call something—investing/returns, donation/blessing, planting/harvesting—if it passes the Howey Test and regardless what kind of animal is being fronted as a business—be it a supposed investment in chicks, pigs, prawns or whatever—if such enticement, solicitation, invitation to put in money or whatever it is called is done without securing a secondarily license from the SEC, then such scheme is illegal and can appropriately be called a scam which can be prosecuted criminally as provided for under the SRC.

Take note that our lawmakers did not just come up with the SRC without reason. The SRC was enacted to protect the investing public. Our Republic has already seen this scenario (Ponzi schemes) played so many times wherein at the end of the day these Ponzi schemes will just merely collapse without warning leaving thousands of people holding an empty bag. I have seen this scenario firsthand as I have had the experience of being a lawyer for victims with hundreds of millions of claims in one of the biggest investment scams (if not the biggest) in the Philippine (amounting to billions of pesos in total) which ran for a decade and collapsed sometime in 2009. The brains behind this investment scam died in 2012. To my knowledge, up to this day not one of the victims of this scam recovered even a single centavo of their investment.

In closing let me also remind everyone that the buying, selling and dealing of unregistered securities is punishable by fine or imprisonment under Section 28 and Section 73 of the SRC which state:

“No person shall engage in the business of buying or selling securities in the Philippines as a broker or dealer, or act as a salesman, or an associated person of any broker or dealer unless registered as such with the Commission… Any person who violates any of the provisions of this Code, or the rules and regulations promulgated by the Commission under authority thereof, or any person who, in a registration statement filed under this Code, makes any untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, shall, upon conviction, suffer a fine of not less than P50,000.00 nor more than P5 million or imprisonment of not less than seven [7] years nor more than  21 years, or both in the discretion of the court.”

Zigfred Diaz is a registered financial planner of RFP Philippines from Cebu City.

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