SEC Issues Rules on Corporate Debt Vehicles
by Vicente Gerochi IV, Kevin Joseph C. Berbaño
Published: October, 2020
Submission: October, 2020
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The Securities and Exchange Commission (SEC) has issued Memorandum Circular No. 23, Series of 2020 (CDV Circular), dated August 18, 2020, which provides a regulatory framework for the creation and operation of Corporate Debt Vehicles (CDV). The circular aims to alleviate the adverse economic effects of the COVID-19 pandemic on large corporations and medium-sized enterprises by giving them another mode of raising capital through the intermediation of a mutual fund.
1. Setting up a CDV
A CDV is a closed-end investment company or mutual fund organized under the Investment Company Act,1 the shares or units of participation of which are offered to any number of qualified buyers,2 or to non-qualified buyers not exceeding 19 persons in the Philippines during any 12-month period. It must be created for the purpose of investing in the corporate debts (secured or unsecured) of (a) large corporations and medium-sized enterprises, or (b) any company the debts of which are guaranteed by (i) a large or medium-sized domestic corporation, (ii) the Philippine government or any of its agencies, or (iii) multilateral agencies involving exempt securities under Rule 184.108.40.206 of the Implementing Rules and Regulations of the Securities Regulation Code.
Large corporations are corporations with total assets of more than Php350 million or total liabilities of more than Php250 million, while medium-sized enterprises are corporations with more than Php100 million to Php350 million in total assets or more than Php100 million to Php250 million in total liabilities.
A CDV must also have a minimum subscribed and paid-up capital of Php50 million, but this amount may be lowered to Php1 million if it is part of a group of investment companies to be created or already in existence and managed by the same fund manager with a track record of at least five years. All of the company’s directors must be Philippine citizens.
2. Offering of securities
A CDV may offer its securities in one or more tranches. The first tranche must be offered within six months from the SEC’s approval of the securities, while subsequent tranches must be offered within three months from submission to the SEC of the company’s current report and updated simplified prospectus.
3. Investment limits
A CDV is prohibited from investing in the securities it is issuing and in corporate debts of corporations in which any of its directors or officers or any of the directors or officers of its investment advisor, fund manager, or distributors is a stockholder or member.
Under the CDV Circular, a fund’s total operating expenses must not exceed 10% of its average investment fund or net worth. It may borrow but only for the purpose of meeting redemptions and meeting corporate requirements, provided the tenor of the borrowing does not exceed one month and the aggregate borrowing does not exceed 10% of the company’s net assets.
5. Need for guidance from other regulators
1 Republic Act No. 2629, as amended.
4 SRC Rule 10.1.2.3.
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