THIRTEENTH CONGRESS OF THE REPUBLI 
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OF THE PHILIPPINES 
1 
First Regular Session 
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Introduced by Senator S. R. OsmelFia 111 
EXPLANATORY NOTE 
Small and medium Enterprises (SME’s) make up a hefty ninety percent (90%) 
of the Philippines’ business establishments and almost ninety-five percent (95%) of 
the export sector. The economic activity they generate in producing basic goods and 
services fuel the growth of our budding economy. The entrepreneurial energies 
unleashed by SMEs will certainly be a motive force in our country’s drive for industrial 
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development. 
For now, however, the prospects for Philippine SMEs are far from sanguine. 
Extremely limiting capital constraints, diseconomies of scale, and lack of access to 
modern technology hobble the growth of SMEs and even threaten their survival. 
This bill proposes the creation of the Small and Medium Enterprises Securities 
Exchange (SMEX) as an institution which will enable SMEs to tap the country’s 
capital market in generating capital for their financial requirements. 
The SMEX can be a window of opportunity not only for SMEs but also for 
investors. The securities market is an important institution that encourages 
entrepreneurial risk-taking as the risks engendered in businesses are spread among 
numerous investors who contribute 
towards the financing of equities. 
The 
development of a SMEX will also facilitate the setting of benchmarks for business 
accomplishments, providing SMEs with additional incentives to hone their capabilities 
in order to become investment-ready and competitive. As businesses grow, the 
government would gain from increased returns in tax collection. 
In the United States, the National Association of Securities Dealers Automated 
Quotations (NASDAQ) stock market was set up for growing companies such as Intel 
and Microsoft, and eventually spawned the unparalleled growth of the US capital 
markets. In the Philippines, it is our hope that the SMEX could provide a similar 
stimulus towards economic resurgence. 
In view of the foregoing, early passage of this bill is earnestly requested. 
SERGIO OSMENA 111 
Senator 


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THIRTEENTH CONGRESS OF THE REPUBLIC 
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OF THE PHILIPPINES 
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First Regular Session 
1 
S E N A T E  
S. No. 
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Introduced by Senator S. R. OsmeAa 111 
AN ACT 
ESTABLISHING THE SMALL AND MEDIUM ENTERPRISES SECURITIES 
EXCHANGE AND GRANTING ADDITIONAL INCENTIVES FOR SMALL AND 
MEDIUM ENTERPRISES 
Be it enacted by the Senate and the House of Representatives of the Republic of the 
Philippines in Congress assembled: 
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SECTION 1. Title. - This Act shall be known and cited as the "Small 
and Medium Enterprises Securities Exchange (SMEX) Act of 2004." 
SEC. 2. Declaration ofPolicy, - It is hereby declared the policy of the 
State to recognize the indispensable role of the private sector in economic 
growth and development. In furtherance of this objective, the establishment of 
small and medium enterprises (SMEs) shall be encouraged, increased access 
to financing to facilitate funds necessary for their expansion shall be provided 
and an economic environment conducive to investments, whether local or 
foreign, to business activities of this nature, shall be created. 
SEC. 3. Creation of the Small and Medium Enterprises Securities 
Exchange. - The Small and Medium Enterprises Securities Exchange (SMEX), 
a capital market catering primarily to SMEs, hereinafter referred to as the 
exchange, is hereby established. 
SEC. 5. Authority of the Small Business Guarantee and Finance 
Corporation. - The Small Business Guarantee and Finance Corporation 
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(SBGFC), a wholly owned government corporation, created by virtue of Republic 
Act 6977, otherwise known as the Magna Carta for Small Enterprises, to 
provide, promote, develop and widen in both scope and service reach various 
alternative modes of financing for small enterprises, is hereby mandated to 
operationalize, manage and eventually privatize the SMEX. 
To attain this purpose, the SBGFC is hereby granted the following 
powers and functions: 
(a) To conduct feasibility and developmental studies; 
(b) To promote the exchange and solicit assistance from the private 
sector; 
(c) To create an organizational framework of the exchange; 
(d) To ordain a code of ethics for the members of the exchange, including 
the criteria for membership, grounds for disciplinary sanctions, 
suspension and expulsion of any member; 
(e) To formulate the procedures and guidelines in the accreditation, listing 
and issuance of securities; and 
(9 To perform such other functions as may be necessary and proper to 
carry out its objectives. 
SEC. 5. Incentives to Small and Medium Enterprises. - SMEs 
accredited by the SBGFC shall be entitled to the following incentives: 
(a)Any gain derived from any sale, barter, exchange or disposition of 
shares of stocks, warrants, or other equity derivatives issued by a 
small and medium enterprise listed and traded in the SMEX, or in any 
regional or secondary stock exchange organized exclusively for small 
and medium enterprises as provided in Republic Act 6977, shall be 
subject to a final tax at the rate of one half of one percent (1/2 of 1%) 
of the gross selling price or gross value in money of shares of stock or 
equity derivatives sold, bartered, exchanged, or otherwise disposed 
which shall be paid by the seller or transferor. 
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(b) Any small and medium enterprise shall be entitled to carry-over its net 
operating losses incurred during the period of five (5) years from the 
effectivity of this Act, as deduction from taxable income up to five (5) 
years following the year of loss and any portion of such loss which 
exceeds the taxable income of such first year shall be deducted in like 
manner from the taxable income of the next remaining four (4) years, 
Provided, however, That newly incorporated companies shall be 
entitled to deduct its net operating loss incurred in any of the first five 
(5) years of operations for five (5) years immediately following the 
year of such loss and portion of such loss which exceeds the taxable 
income of such first year shall be deducted in like manner from the 
taxable income of the next remaining from years. 
(c) The issuance of shares of the capital stock of any small and medium 
enterprise in the following manner shall be exempt per se from 
registration under the Revised Securities Act: 
(1) The issuance of its capital stock in an amount of up to an 
aggregate par value of PESOS: TWENTY-FIVE MILLION 
(P25,000,000.00) to not more than twenty (20) persons; 
(2) The additional issuance of shares of its capital stock to existing 
shareholders andlor its affiliates under common control; and 
(3) The issuance of its capital stock regardless of the amount and 
number of persons, to the following: institutional investors, 
venture 
capital 
corporation, 
mutual 
funds, 
investment 
companies, investment houses, including their trust and 
managed accounts, dealers in securities, stock brokers, 
publicly owned holding companies, insurance companies, 
government financial institutions, banks to the extent of their 
allowable equity investments and their trust and managed 
accounts, pension and retirement funds approved by the 
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Bureau of Internal Revenue, and other entities which the 
Securities and Exchange Commission may, from time to time, 
classify as institutional investors. 
(d) The sale, barter, exchange or disposition of shares of stocks, 
warrants, or other equity derivatives issued by a small and medium 
enterprise through initial public offering, shall not be subject to any 
tax. 
(e) For purposes of this Act, any investment in primary shares of stock to 
any SBGFC accredited SMEs shall form part of the allowable 
compliance to Section 13 of Republic Act 6977. 
For purposes of determining the enterprises that may be eligible for 
the above state incentives, SBGFC shall establish an accreditation 
system and shall be responsible for issuing or withdrawing accreditation 
authority. All small and medium enterprises wishing to qualify for 
incentives under this Act shall register with the SBGFC. Furthermore, 
other incentives and services currently offered by SBGFC shall be 
accorded to SMEs. 
SEC., 6. Accountability. - The funds of the exchange, including 
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disbursements, shall be subject to existing auditing rules and regulations 
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SEC. 7. Transitory Provision. - The SBGFC shall cause the 
governing government owned and controlled corporations. 
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(5) years. 
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accordingly. 
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privatization of the exchange and turn over the management and operation to its 
members within a period not earlier than three (3) years but not more than five 
SEC. 8. Repealing Clause. - Any provision of law, decree, executive 
order or issuance inconsistent herewith are hereby repealed and/ or modified 
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SEC. 9. Separability Clause. - If any of the sections or provisions of this 
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Act is held invalid, all the other provisions not affected thereby shall remain valid 
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newspapers of general circulation 
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Approved, 
SEC. 4. Effectivity Clause. - This Act shall take effect fifteen (15) days 
after its publication in the Official Gazette or in at least two (2) national 
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