Selling Unregistered Securities: How Startups Face Criminal Charges?
Introduction: why startup fundraising can become a criminal case
Many tech startups raise early capital through “pre-selling” investment slots, “VIP investor packages,” “convertible promises,” or revenue-sharing offers promoted on social media or through referral networks. In Philippine law, these activities can be treated as a sale or offer for sale of securities to the public. If the securities are not registered with the Securities and Exchange Commission (SEC) and the persons selling them are not properly licensed, founders and promoters may face administrative sanctions and, in severe cases, criminal prosecution under the Securities Regulation Code.
This explainer focuses on the criminal exposure founders can face when raising capital from the public without SEC approval, and how to reduce risk before engaging investors.
Primary law governing the “criminal trap”: R.A. No. 8799 (Securities Regulation Code)
The central statute is R.A. No. 8799 (the Securities Regulation Code or SRC). The SRC generally requires that securities must not be sold or offered for sale or distribution within the Philippines without a registration statement filed with and approved by the SEC. The SRC also regulates who may act as brokers, dealers, and salesmen and penalizes market abuse and unlawful selling activities.
Two common risk areas for startups are:
(1) Selling or offering unregistered securities to the public, even when labeled as “membership,” “franchise,” “crowdfunding,” “profit-sharing,” or “investment program,” if the substance fits the legal concept of a security or investment contract.
(2) Acting as or using unlicensed brokers/agents who solicit investors, refer prospects, conduct presentations, or otherwise help close sales without SEC registration as broker, dealer, or salesman.
What counts as “selling” or “offering” securities to the public
Under SEC enforcement practice applying the SRC, fundraising becomes legally sensitive when there is a public offering or a broad solicitation, especially using mass or online channels. The SEC has treated activities like distributing flyers, conducting orientation seminars, and internet promotions as indicators of public offering activity for purposes of SRC enforcement (SEC Adm. Case No. 03-08-002, 2010).
Typical startup behaviors that can be legally risky include:
- Posting investment invitations on Facebook, TikTok, Telegram, Discord, or public groups.
- Holding “investor briefings” open to the public or to large, loosely screened audiences.
- Offering fixed returns, guaranteed payouts, or passive income “from the company’s trading/operations.”
- Using referral commissions to encourage others to bring in investors.
“But we didn’t call it a security”: substance-over-label treatment
In enforcement actions, the SEC looks at the economic reality of the arrangement, not the marketing label. For example, the SEC found that a “sub-franchising” program could still constitute an unregistered investment contract where it was marketed to the public and had passive investment characteristics (SEC EIPD Case No. 2026-8089, 2026).
This is why founders should not assume that rebranding an investment as a “package,” “slot,” “affiliate license,” “points,” or “franchise” automatically avoids SRC coverage.
Criminal liability risk: founders, officers, and even “referrers”
Criminal exposure may arise not only for the issuing entity, but also for individuals involved in solicitation and sale, depending on their acts and the charge filed.
Philippine jurisprudence recognizes that someone who actively solicits or refers prospective investors with the end view of closing the sale of securities may be held liable for acting as an unregistered broker/dealer/salesman. The Supreme Court held that liability can attach even without a formal agency contract or direct receipt of investor funds, if the person’s actions effectively bring about the sale (Securities and Exchange Commission v. Santos, G.R. No. 195542, 2014).
At the same time, the Court in the same case also discussed the distinction between the firm’s duty to register securities and the role of individuals, emphasizing that the issuer (through authorized officers) is generally the party responsible for registration of securities under the SRC (Securities and Exchange Commission v. Santos, G.R. No. 195542, 2014). In practice, enforcement often pairs “unregistered securities offering” issues with “unlicensed selling” issues, depending on the evidence and the roles of the people involved.
How criminal cases under the SRC typically begin: SEC first, then DOJ
A common misconception is that criminal complaints can be filed directly in court without SEC involvement. The Supreme Court has ruled that a criminal complaint for violation of the SRC must first be filed with the SEC, which may conduct such investigation as it deems necessary before referring the case to the Department of Justice (DOJ) for preliminary investigation and prosecution (Tengco III, et al. v. People of the Philippines, et al., G.R. Nos. 236620/236802/237156, 2023).
The Court further clarified that as long as the SEC receives the complaint and refers it to the DOJ after its own investigation, and due process is afforded at the DOJ level, claimed irregularities in the SEC investigation generally do not deprive the trial court of jurisdiction and are not, by themselves, grounds to quash the information (Tengco III, et al. v. People of the Philippines, et al., G.R. Nos. 236620/236802/237156, 2023).
Regulatory and enforcement consequences beyond criminal prosecution
Even before a criminal case matures, startups and related entities may face serious SEC actions, including:
- Cease-and-desist orders (CDOs), including ex parte CDOs when there is substantial evidence of ongoing fraud or grave injury to investors (SEC CDO Case No. 05-20-064, 2020).
- Asset freezes to preserve funds for the benefit of investors (SEC CDO Case No. 05-20-064, 2020).
- Revocation of corporate registration for unlawful offering/sale of unregistered securities or serious misrepresentation in obtaining SEC registration (SEC En Banc Case No. 08-11-133, 2013; SEC Adm. Case No. 03-08-002, 2010).
These measures can shut down operations quickly, disrupt banking relationships, and create reputational damage that prevents future legitimate fundraising.
Is crowdfunding an exception? Only if done under SEC rules
Some founders assume “crowdfunding” is automatically allowed. It is not. Crowdfunding may be exempt from full securities registration only when conducted under the SEC’s rules and within set limits.
Under SEC Memorandum Circular No. 14, s. 2019 (Rules and Regulations Governing Crowdfunding), certain offerings up to a stated threshold may qualify for an exemption from registration, subject to requirements such as using a registered crowdfunding intermediary and complying with investor and issuer limits (SEC MC No. 14, s. 2019).
If a startup raises money online while calling it “crowdfunding” but does not comply with the SEC’s crowdfunding rules, it may still be treated as an unregistered public offering.
Common startup scenarios and how regulators may view them
| Startup activity | Why it can trigger SRC issues | Risk notes |
|---|---|---|
| Posting “invest now, earn monthly returns” | May be treated as a public offering and an investment contract | High risk; invites CDOs, asset freezes, and criminal referral |
| Paying commissions to “brand ambassadors” who recruit investors | May be treated as unlicensed broker/dealer/salesman activity | Individuals can be exposed even if they never held the funds (SEC v. Santos, G.R. No. 195542, 2014) |
| Calling investments “franchise slots” but investors are passive | SEC may treat it as an investment contract despite the label | Enforcement looks at substance, marketing, and investor expectations (SEC EIPD Case No. 2026-8089, 2026) |
| Online “crowdfunding” without a registered intermediary | May fall outside the exemption and be treated as unregistered offering | To rely on the exemption, comply with SEC MC No. 14, s. 2019 |
Risk reduction steps founders should consider before soliciting investors
Founders should treat fundraising as a regulated activity and adopt compliance steps early. The following are risk-reducing measures commonly aligned with SRC enforcement patterns:
- Get a securities law review before any public promotion, especially if marketing uses social media, referral systems, or promised returns.
- Avoid return guarantees and “passive income” language unless the structure is clearly permitted and compliant; such claims often resemble investment contracts.
- Control who solicits; do not allow unlicensed “agents” to sell investments or close deals, and avoid commission-based recruitment.
- Use permitted fundraising channels (for example, a compliant crowdfunding route under SEC MC No. 14, s. 2019, when applicable), and comply with limits and disclosure rules.
- Document investor screening and offering terms; poor documentation can worsen enforcement outcomes and investor disputes.
Conclusion: treat capital-raising as regulated, not informal
For tech startups, fundraising is not merely a business milestone; it can be a regulated securities event. Under R.A. No. 8799, offering investments to the public without SEC registration and using unlicensed sellers can lead to SEC shutdown measures and criminal prosecution. Supreme Court rulings recognize exposure for those who actively solicit investments, even if they are not formal signatories or fund-holders, depending on their role in closing sales (Securities and Exchange Commission v. Santos, G.R. No. 195542, 2014). Criminal complaints also typically pass through the SEC before DOJ prosecution, and procedural objections may not stop a case once due process is observed at the DOJ stage (Tengco III, et al. v. People of the Philippines, et al., G.R. Nos. 236620/236802/237156, 2023).
Founders should get legal clearance before inviting the public to invest, confirm whether the product is a security or investment contract, and choose a compliant fundraising method rather than relying on labels or informal market practice.
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