Blue Sky Law

Published December 9, 2021, 11:36 AM

by Atty. Jun De Zuñiga

In one Senate committee hearing on investment scams, then Senator Juan Ponce Enrile asked: “What is now the prevailing Blue Sky Law?” Very few understood the question. In general, blue sky laws are enacted by governments to prevent securities dealers from committing fraud through the sale of fake securities. These laws generally require the registration of issuers and dealers with regulatory agencies. The term ‘blue sky” is derived from being able “to sell the sky” to an investor without limitations and restrictions. It is like selling imaginary promises, with no realistic value, under the broad, wide blue sky.

In the Philippine setting, the Blue Sky Law was first enacted in 1916 as Act No. 2581 and was superseded by the Securities Act of 1936 under Commonwealth Act No. 1936. In 1982, it was replaced by the Revised Securities Act under Batas Pambansa Blg. 178. The last legislation on the subject, and this is in answer to the question of Senator Enrile, is the Securities Regulation Code of 2000 under Republic Act No. 8799.

The origin and rationale for the Blue Sky Law was expounded by the Supreme Court in 1938 (People vs. Vicente Fernandez and Joaquin Trinidad, G. R. No. L-458655) where it declared: “Act No. 2581, better known as the Blue Sky Law, is patterned after similar laws enacted in various states of the Union, one of the oldest of which, if not the oldest is that of the State of Kansas, which was amended in 1913 and 1915 (Fletcher, Vol. 7, 1919, p. 7714). The purpose of these laws, as was said by Justice Mckenna, is to protect the public against the imposition of unsubstantial schemes and the securities based thereon. It is said that the name given the law indicates the evil against which it is directed, namely, speculative schemes which have no more basis than a few feet of the blue sky.”

The following year, the Supreme Court sustained the authority of the Government to cancel certificates of registration of securities dealers, to wit: “In view of the intention and purpose of Act No. 2581 – to protect the public against speculative schemes which have no more basis than so many feet of blue sky and against the sale of stock in fly-by-night concerns, visionary oil wells, distant gold mines, and other like fraudulent exploitations, we incline to hold that public interest in this case is a sufficient standard to guide the Insular Treasurer in reaching a decision on a matter pertaining to the issuance or cancellation of certificates or permits” (People v. Rosenthal, 68 Phil. 328, 1939).

More than eight decades later, the stinging rebuke of the Supreme Court against fraudulent fund raising schemes continue to resonate until the present as we hear of the Securities and Exchange Commission flagging down the investment schemes of numerous fraudulent operators. It is basically the same pyramiding structure, with some variations, but with all promising stupendous returns such as a 400% return on investments, paid-in contributions of P1000 each growing to P2500 after one week, “paluwagan” schemes earning 40% every month, and other similar high-paying schemes. The Government has repeatedly issued advisories and warnings against these too-good to be true investment scams. Sadly, the frauds continue to happen. The next best thing is to see all these scammers in jail under the prevailing Blue Sky Law.

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The above comments are the personal views of the writer. His email address is [email protected]

 
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