Japan-based ad firm contests SEC order

G. Cosmos Philippines Inc. is contesting the cease-and-desist order (CDO) issued against it by the Securities and Exchange Commission (SEC) last July 26, arguing that the business it offers to interested parties "do not fall within the definition and ambit of an investment contract."

The SEC has ordered G. Cosmos, a Japan-based advertising-related firm, to stop its operations for the illegal sale of contracts in its mail order business.

The corporate watchdog based the CDO on verified complaints from investors which showed the firm had violated a provision of the Securities Regulation Code involving the unregistered sale of investment contracts.

But G. Cosmos counsel, the law firm of Nitorreda Nasser and Layusa, said the CDO was "improvidently issued, as it tends to harm and prejudice the interest of its investor participants instead of pretending to protect the general investing public."

The G. Cosmos counsel explained that the nature of securities, as envisioned under the law, is one that is in the nature of a forbearance of money, whereby investments are made in intangible forms of profit-generating schemes.

"In the case of G. Cosmos, the character and nature of the investment forms part of an entire process and is in effect an investment in a tangible good or item. The investment scheme can be likened to the acquisition of an interest in a selected item, which through its sales, generates cash receipts by which profits or losses can be determined. This notably is now commonly the subject of enterprises popularly known as ‘network marketing,’ which types of business are not regulated or governed by the regulatory functions of this Honorable Commission," the law firm said.

G. Cosmos was registered with the SEC on Aug. 8, 1999 primarily to undertake advertising campaign plans under its so-called G. System created by its chairman Genta Ogami. The company, headquartered at the Madrigal Business Park in Muntinlupa, is 30 percent owned by Japanese nationals Ogami and Takahiro Yokoi while its local incorporators include Anselma Calima, Dolores Cuneta and Wilfredo Cuneta of Las Piñas.

Under the G. System, the company collects money for advertising from the average consumer for its mail order sales business. The money collected is used to conduct mail order sales in Japan through newspaper, television or magazine ads and profits are paid directly to the people who have paid for the advertising costs.

Anyone interested to enroll and earn from the G. System must first register as a member by paying a membership fee which is renewed yearly. The company offers a five-percent incentive commission to members who can recruit new members to the system which will be deducted from the net profit/dividend earned by the new recruit.

In its CDO, the SEC said G. Cosmos violated Sec. 8.1 of the SRC which states that securities, including investment contracts, shall not be sold or offered for sale on distribution within the Philippines without a registration statement duly filed with and approved by the Commission.

The G. System is considered a form of investment contract, which is defined as a transaction or scheme wherein a person invests his money in a common enterprise and is led to expect profits from the efforts of others. The term "investment contract" has been viewed as a "catch-all" phrase designed to encompass novel devices which serve the same purpose as a security.

Thus, the SEC said G. Cosmos’ scheme of collecting from its members the advertising costs for its mail orders sales in Japan falls within the purview of the definition of investment contract.

But G. Cosmos said in its motion that unlike investment contracts, as considered under the law, the scheme offered by G. Cosmos is not tantamount to a profit sharing arrangement.

"The placement of money cannot be isolated from the whole marketing system in which G. Cosmos operates. For the investment forms an integral part of the whole system. It is not separate and distinct but ensconced in the mail order system," G. Cosmos said.