Part I.

Objectives
To raise capital to fuel growth for the remainder of the year through several fund-raising
options:

1. Raise Local Money

2. Bring in money from Latvia
3. Create a P2P company here in the Philippines

Part II. Background and Legal Consequences

A. Raise Local Money

Raising capital from individual lenders in the

Philippines by issuing promissory note and post-dated checks in favor of the
lender. This process is the most convenient yet limited one to raise the capital
fuel. Considering the nature of contract involve, parties will be governed by its
agreement and basic principles of Civil Law. Applications of stringent laws such
as AMLA and all other SEC and BSP circulars will no longer be a threat to RFC’s
operation. The only special law which RFC should pay attention to is the Anti-
Bouncing Check Law (BP 22) in case of our default provide funds for the post-
dated checks that RFC issued.

While this process provides for a convenient way of raising the capital fuel, this
may not easily be possible at the moment considering the lack of manpower with
the Accounting/Finance Team.

B. Bring in money from Latvia through P2P platform between EU residents and
Philippine borrowers

The P2P platform between EU residents and Philippine borrowers shall be

consider as a form of quasi-banking function which requires prior license from the
Philippine government entities particularly the Banko Sentral ng Pilipinas (BSP).
In the Manual of Regulations for Non-Bank Financial Institutions (MORNBFI), the
BSP defines financial intermediaries as persons or entities whose principal
functions include the lending, investing or placement of funds or evidences of
indebtedness or equity deposited with them, acquired by them, or otherwise
coursed through them either for their own account or for the account of others.1

The manual also recognizes the function which the financial intermediaries should
perform in a regular and recurring manner, not merely on an isolated basis to wit:

1
Annex Q-3-b of 2008 of Manual of Regulations for Non-Bank Financial Institutions (MORNBFI),
 a. Receive funds from one (1) group of persons, irrespective of number,
through traditional deposits, or issuance of debt or equity securities;
and make available/lend these funds to another person or entity, and in
the process acquire debt or equity securities;

b. Use principally the funds received for acquiring various types of debt or
equity securities;

c. Borrow against, or lend on, or buy or sell debt or equity securities;

d. Hold assets consisting principally of debt or equity securities such as

promissory notes, bills of exchange, mortgages, stocks, bonds, and
commercial papers;

e. Realize regular income in the nature of, but need not be limited to,
interest, discounts, capital gains, underwriting fees, guarantees, fees,
commissions, and service fees, principally from transactions in debt or
equity securities or by being an intermediary between suppliers and
users of funds.

Considering that the funds to be used in this business model will be primarily from EU
residents who shall be considered as investors, the provisions of the Anti-Money Laundering
Law shall be carefully observed. The Anti-Money Laundering Law provides for covered and
suspicious transaction which considerably will affect the operation of RFC as follows:

Rule 3.b. "Covered Transaction"2 means:

“Covered transaction” refers to:

1. A transaction in cash or other equivalent monetary instrument

exceeding Five Hundred Thousand pesos (Php500,000.00)

2. A transaction exceeding One Million pesos (Php1,000,000.00)

in cases of jewelry dealers, dealers in precious metals and dealers
in precious stones.

“Suspicious Transaction” refers to a transaction, regardless of

amount, where any of the following circumstances exists:

1. There is no underlying legal or trade obligation, purpose or

economic justification;

2. The client is not properly identified;

3. The amount involved is not commensurate with the business

2
“2016 Revised Implementing Rules and Regulations of Republic Act No. 9160, as
Amended”
 or financial capacity of the client;

4. Taking into account all known circumstances, it may be

perceived that the client’s transaction is structured in order to
avoid being the subject of reporting requirements under the
AMLA;

5. Any circumstance relating to the transaction which is observed

to deviate from the profile of the client and/or the client’s past
transactions with the covered person;

6. The transaction is in any way related to an unlawful activity or

any money laundering activity or offense that is about to be
committed, is being or has been committed; or

7. Any transaction that is similar, analogous or identical to any of

the foregoing.

Applying the aforementioned provisions, the funds which will be obtained from the EU
residents through the banking facility will be considered as “Covered Transaction. It is the
banking facility that has responsibility of observing the enhanced due diligence considering the
amount involved. Thus, RFC would only need to establish to the bank the lawful source of the
funds from EU. The bank may require RFC to present proof of legal source of funds and the
process of identifying the customers involved prior the transaction. 3

The determination whether the transaction will fall under Covered or Suspicious
Transaction is necessary since the risk with the issuance of freeze order would normally took
place for Suspicious Transaction. It would only be upon a verified ex parte petition by the AMLC
and after determination that probable cause exists that any monetary instrument or property is
in any way related to an unlawful activity, the Court of Appeals may issue a freeze order, which
shall be effective immediately. The Freeze Order cannot be a subject of injunction but may be
remedied by a Motion to Lift Freeze Order.

This process is quite risky considering that RFC will be under a strict scrutiny of BSP
and AMLC but once establish it would run smoothly. A good choice of bank will also be of great
help since the bank will be the one to explain to AMLC.

C. Creation of P2P company

Currently, we have P2P business here in the Philippines such as FundKo under
Fintechnology, Inc., and MoneyMatch under FinTech Global Resources, Inc., But
only Fintechnology Inc. is registered with SEC.

We can work on the incorporation of a normal corporation or amend the existing

Articles of Incorporation of RFC by providing additional purpose of its
incorporation. Then we would need to secure secondary license also from SEC
since P2P can be likened to a business operating as an investment house for its
clients. There is no direct jurisprudence nor circulars regulating the P2P. However,
SEC Regulation Code provides that for a corporation to solicit investments from

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This is without prejudice to any other process or requirement that the bank may require.
 the public in the Philippines, a secondary registration shall be obtained. This
secondary registration is most of the time the subject of SEC advisory and
suspension orders.

Supreme Court also clarified in its decision last March 19, 2014, the scope and
nature of securities as follows:

“As to the issue on whether or not PMPA is a security contract,

we rule in the affirmative, as supported by the herein below
provisions of the SRC, particularly:

Sec. 8. Requirement of Registration of Securities. – 8.1.

Securities shall not be sold or offered for sale or distribution
within the Philippines, without registration statement duly filed
with and approved by the Commission. Prior to such sale,
information on the securities, in such form and with such
substance as the Commission may prescribe, shall be made
available to each prospective purchaser.

Securities have been defined as shares, participation or

interest 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 among others, investment
contracts, certificates of interest or participation in a
profit sharing agreement, certificates of deposit for a
future subscription.

Under the SRC’s Amended Implementing Rules and

Regulations, specifically Rule 3, par. 1 subpar. G, an
investment contract has been defined as a contract,
transaction or scheme (collectively “contract”), whereby a
person invests his money in a common enterprise and is led to
expect profits primarily from the efforts of others. It is likewise
provided in the said provision that an investment contract is
presumed to exist whenever a person seeks to use the money
or property of others on the promise of profits and a common
enterprise is deemed created when two (2) or more investors
“pool” their resources creating a common enterprise, even if
the promoter receives nothing more than a broker’s. “
4
(Emphasis Ours)

Absence of any advisory pertaining to P2P business in the Philippines, we may apply
by analogy the advisories and circulars issued by SEC to corporation which offers securities

4
G.R. No. 195542, March 19, 2014 SECURITIES AND EXCHANGE COMMISSION, Petitioner, v. OUDINE
SANTOS, Respondent
to public. A recent advisory was issued by SEC last April 18, 2018 pertaining to online
investment from unregistered entities. 5

We may also apply by analogy the advisory made against FarmOn, a crowdfunding
community operating as a domestic corporation here in the Philippines. FarmOn offers
investment to the public by soliciting funds to those who wanted to engage in farming by
financing the partners at their own expenses. The solicited funds have the corresponding
return after a certain period. The business operation of FarmOn can be likened to a P2P
transaction except for the subject investment and the purpose of investment. With FarmOn,
the investors get to choose between the crops offered in their platform and pay for the
corresponding amount. The payment made by these investors will be used for the expenses
of the farmers and return of investment will be given after the harvest. In P2P, the lender
chooses the amount/ package depending in his risk appetite and such amount will be available
to respective borrowers. In May 2016, the SEC issued an advisory clarifying that FarmOn has
no primary nor secondary registration to operate in the Philippines. It was only after the
advisory that FarmOn made the primary registration.

Although foreign jurisprudence recognizes the difference between Peer to Peer

lending and crowdfunding, such difference matters as to the matter of arrangements in which
people are asked to contribute money in exchange for potential profits. Dealing with financial
securities is connected to the problem about ownership: In P2P, the problem of who owns the
loans and how that ownership is transferred between the originator of the loan (the person-
to-person lending company) and the individual lender(s). This question arises especially when
a peer-to-peer lending company does not merely connect lenders and borrowers but also
borrows money from users and then lends it out again. Such activity is interpreted as a sale
of securities, and a broker-dealer license and the registration of the person-to-person
investment contract is required for the process to be legal.

Part III. Conclusion

To raise the capital fuel in an immediate and sustainable manner, RFC could adopt first
the third option which is the creation of P2P Company in the Philippines while bringing in the
money from Latvia through P2P platform between EU residents and Philippine borrowers as
second option is on process. For the first option, RFC may choose not to act as a financial
intermediary since this would require prior approval from Bangko Sentral ng Pilipinas (BSP)
and entails a stricter policy compare with Securities and Exchange Commission (SEC). BSP
can immediately imposed an automatic revocation of the license issued in case where the
required capital-build up program is not met. While for SEC suspension of revocation takes
place only when information contained in the registration statement filed is or has become
misleading, incorrect, inadequate or incomplete in any material respect, or the sale or offering
for sale of the security registered thereunder may work or tend to work a fraud. SEC initially
issues advisories prior the suspension and provides administrative remedies prior the
issuance of Cease and Desist Order. Thus, it would be safe for a start up company to deal
with SEC than with BSP.

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http://www.sec.gov.ph/wp-content/uploads/2018/04/2018Advisory_WarningOnBitcoin_Related_Ponzi.pdf