Study Phase 2 by classification, not repetition: for every scenario, decide whether the offering is a security, whether the act is solicitation, and which duty follows. The sections below teach the investment contract framework, the information-versus-solicitation line, product structures, suitability chains, ethical wording traps, and a two-column compliance map, each with drills you can run on paper.
Why the investment contract question comes before everything else
Before applying any solicitation rule, classify whether the thing being offered is a security. Under the Securities Regulation Code framework, an investment contract is generally analyzed as money invested in a common venture with an expectation of profits derived primarily from the efforts of others.
Break the framework into working elements: a client supplies capital, funds are pooled or otherwise tied to a common enterprise, the client expects profit, and that profit depends chiefly on the promoter's or manager's efforts rather than the client's own work. Practice testing each element against a product description. A 'digital ad package' that promises daily returns for a passive buyer, for example, clears every element even though nothing about it sounds like a stock or a bond.
The controlling point is substance over form. Marketing labels like 'package,' 'membership,' or 'franchise' do not decide the question; the economics do. A useful drill is to take any pitch you see on social media, write the four elements in a column, and mark each one present or absent with a one-line reason. If your reasons rely on the product's name instead of its structure, redo the analysis.
Scenario seed: a scheme sells 'ad packages' at set prices, promises a fixed daily payout, and pays referral bonuses for recruiting other buyers. Try classifying it before reading further sections, then revisit your answer after finishing this guide.
- Element drill: capital supplied, common enterprise, profit expectation, reliance on others' efforts
- Write a one-line reason for each element, not just a yes or no
- Ignore the product's marketing label and analyze the cash flows
Information versus solicitation: where the line actually moves
Describing a product factually can be permissible communication; urging someone to buy, promising returns, or handing over subscription papers is solicitation that requires the offering to be registered and the person to hold proper authority.
The trigger is inducement, not topic. Explaining how a fund works, answering factual questions, or pointing to publicly available documents sits on one side. Recommending a purchase, emphasizing assured income, creating urgency, or supplying forms and collection details crosses to the other. Factual talk can convert into solicitation the moment it is paired with encouragement to act, so judge the whole conversation rather than isolated sentences.
Scenario A: an agent is asked by a church group to 'just explain' a cooperative's share plan that advertises fixed monthly dividends. The mistake: the agent describes the plan as safe guaranteed income and leaves subscription forms behind, intending only to be helpful. The better decision: recognize that guaranteed-return language plus an invitation to subscribe is inducement; decline to promote unless the offering is registered and the agent holds the required authority, and refer substantive questions to the issuer's compliance function. Why it matters: liability attaches to the act performed, and a helpful explainer who supplied forms has performed the regulated act.
- Inducement markers: recommendations, return promises, urgency, forms and payment details
- Information markers: neutral descriptions, answers to factual questions, public documents
- Judge the full conversation, since factual talk plus a call to act becomes solicitation
Product structures and how each one changes your disclosure duty
Direct securities, pooled vehicles, and deposit-like or fixed-return structures distribute risk differently, so the disclosure and suitability focus shifts with the structure rather than staying constant across products.
With common shares, the buyer bears issuer performance and market risk, so disclosure centers on volatility and the absence of assured returns. With corporate debt or commercial paper, the central issue is the issuer's credit standing and what happens on default. With pooled investment funds, returns depend on a manager's decisions and are expressed through fund value rather than a coupon, so disclosure should cover strategy, fees, and how value can fall.
Structures advertising fixed or guaranteed returns deserve separate scrutiny regardless of their label: ask whether the instrument is a registered security or a scheme whose economics match the investment contract elements from Section 1. Build a one-page map per product family answering three questions: who holds the client's money, what the return actually depends on, and which documents the client should receive before subscribing. The table below is a starting map you should extend from your own review materials.
| Structure | Return depends mainly on | Key client disclosure focus |
|---|---|---|
| Common shares | Issuer performance and market conditions | Volatility, no assured returns, timing of any gains |
| Corporate bonds / commercial paper | Issuer credit and repayment capacity | Credit risk, what happens on default or delay |
| Pooled investment funds | Manager's decisions and strategy | Strategy, fees, how fund value can decline |
| 'Guaranteed return' schemes | Continuity of promoter's operations | Whether registered; payout source; investment contract elements |
Suitability as a documented chain, not a signed questionnaire
Suitability is the reasoning chain that connects gathered client facts to a product's risk features and ends in a written justification. The questionnaire is only the input; the defensible part is the link you can articulate between them.
Scenario B: a retired client who depends on a pension asks for investments producing high monthly income. The salesperson recommends an aggressive technology fund because the client ticked 'high tolerance' on the risk question. The mistake: treating a signature as consent while ignoring the client's income requirement and low capacity to absorb loss, which the objective facts contradict. The better decision: reconcile the conflict explicitly, propose a conservative registered alternative that matches the income need and horizon, or decline the trade and record why. Why it matters: the file should show that opposing signals were identified and resolved, not that a form was completed.
To build the habit, split client information into two layers. Objective facts are age, dependents, income sources, and obligations. Subjective facts are stated goals and self-described tolerance. When the two layers disagree, the suitability chain must address the disagreement in writing, because a recommendation that ignores the conflict is the weakest kind of file to defend afterward.
- Objective layer: age, obligations, income sources, capacity to absorb loss
- Subjective layer: stated goals, self-described tolerance, preferences
- A suitability chain names the conflict between layers and how it was resolved
Ethical traps that live in wording, not intent
Most ethical exposure in solicitation comes from specific wording practices: implying assured returns, presenting past performance as a promise, borrowing credibility, and omitting material risks from an otherwise accurate pitch.
Learn the named practices so you can spot them mid-sentence. Guaranteeing or strongly implying assured income misstates how returns arise. Citing past performance as assurance misuses history as a prediction. Using testimonials, church or community endorsements, or the reputation of a known institution to imply official backing is borrowed credibility. Showing only the best historical period, or hiding fees and exit conditions, is omission of material facts even when every stated sentence is technically true.
Turn this into a rewriting drill. Take five real marketing lines, such as 'guaranteed 2 percent monthly, endorsed by members of our parish' or 'our fund has never had a losing year.' Rewrite each so it is accurate and complete: replace assurance language with a description of how returns are generated, attach risk disclosure, and remove implied endorsements. Then check the rewrite for the opposite failure, which is so much hedging that the client learns nothing about the product. A compliant line informs without promising.
- Assured-return wording: guarantees, 'fixed income' used loosely, 'safe' applied to market products
- Borrowed credibility: testimonials, community endorsements, institutional name-dropping
- Omission: best-period-only charts, hidden fees, undisclosed exit restrictions
The two-column compliance map you should be able to redraw
From memory, sketch two columns: offering-side requirements, where the security itself must be registered before a public offering, and person-side requirements, where the individual selling or soliciting must hold the proper authority through a licensed intermediary.
The columns are independent, and mixing them is where analysis collapses. A registered product does not authorize an unlicensed person to sell it; a licensed person cannot lawfully promote an unregistered scheme. Continuing obligations sit on the person side too: making accurate representations, keeping records, and transacting through proper channels rather than personal arrangements. When you meet any scenario, place it in both columns before deciding what went wrong.
Test the map against mixed cases. Case one: a friend with no selling authority offers you shares in a company whose registration papers are genuine. The offering side may look orderly, but the person side fails. Case two: a licensed salesperson promotes a 'cooperative package' with fixed monthly payouts and no evidence of registration; the person side looks orderly, but the offering side fails. Redraw the two columns from blank paper weekly until both cases resolve in seconds, because mixed cases are precisely where the two requirements are easiest to conflate, and rapid separation is the habit worth automating.
- Offering side: security registration before public offering, prospectus and disclosure documents
- Person side: licensing/authority, association with a licensed intermediary, accurate representation
- Run mixed cases weekly: registered product sold by an unauthorized person, and the reverse
Scenario-drill routine, self-check rubric, and readiness checks
Convert each syllabus topic into short written scenarios where you classify the product, label the act as information or solicitation, and name the triggered duty, then grade yourself against the rubric below before moving on.
The exercise: write six mini-cases of four to six sentences each, one per syllabus topic, using paper scenarios drawn from ads, group chats, or community pitches you observe. For each case, answer in order: Is this a security under the investment contract elements? Is the described act solicitation or information? Which duty applies, and to whom? Expected observations: your classification step comes before any duty is named, and your duty statement names both the requirement and the person it binds. If you name a duty first and reason backward, redo the case.
Adaptable sequence: week one, product classification drills using the four elements; week two, the information-versus-solicitation line with rewriting drills; week three, suitability chains using the two-layer client model; week four, the compliance map plus timed full-scenario drills. Readiness checks: you can redraw the two-column map from blank paper, rewrite five marketing lines into compliant wording, and resolve a fresh mini-case in a few minutes with classification first. Self-check scores here are learning milestones only and do not predict any exam result.
- Rubric: product classified with element-by-element reasons, not labels
- Rubric: act labeled information or solicitation with the specific trigger identified
- Rubric: duty named together with the person or party it binds
- Rubric: client facts connected to product risk in one written sentence
- Rubric: no guarantee or assurance language appears anywhere in your answer
- One short note: fees, schedules, and administrative requirements belong to the SEC Philippines at https://www.sec.gov.ph/ and are outside this guide's scope.
References and further reading
Use these references to explore the concepts and check the latest information from the relevant organizations.