The commission en banc, acting on the recommendation of the Compliance and Enforcement Department, issued the cease-and-desist order (CDO) against G. Cosmos as an investigation based on complaints from investors showed the firm violated a provision of the Securities Regulation Code involving the unregistered sale of investment contracts.
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 Pinas.
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.
Among the products include 18-karat gold pendants, designer watches, compact zoom cameras, gold and beaded bracelets and necklaces, and even medical neck pillow.
In its membership guide, the company said the system was devised precisely to do away with bank loans to finance the high advertising costs of mail order sales of products and simultaneously to share profits with the members of the company who 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.
Once a member, an individual who pays the advertising cost of a chosen product receives his profit on a designated date monthly, but only after four months from making the entry.
Based on the G. System, the rate of profit offered is 30 percent of the total sales of the product. The percentage participation of a member in the 30 percent rate of profit, however, has to be calculated on the basis of his proportionate share in the advertising cost of the product. As provided in the agreement, a five percent service fee will also be deducted from the members’ receivable income.
Thus, a person interested to earn through the system has to pay a membership fee of P3,000 (unless waived for promotional purposes), and entry fee of P110 and the advertising cost, depending on the medium utilized (P1,650 for TV/magazines; P660 for newspapers; and P1,100 for newspaper flyers).
While a member expects to earn from his minimal share in the total proceeds, the company gets 70 percent of the total sales proceeds plus five percent of the member’s income.
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 order sales in Japan falls within the purview of the definition of investment contract.