The Philippines recently passed three new laws to assist micro, small, and medium enterprises (MSMEs) and start-ups. Republic Act No. 11293, otherwise known as the Philippine Innovation Act (PIA), is mainly intended to generate and scale up action in all levels and areas of education, training, research and development towards promoting innovation and internationalization activities of MSMEs as drivers of sustainable and inclusive growth. Republic Act No. 11337, otherwise known as the Innovative Startup Act (ISA), is aimed to streamline government and non-government initiatives in both local and international spheres in order to create new jobs and opportunities, improve production, and advance innovation and trade in the Philippines. Equally worth noting is Republic Act No. 11057, otherwise known as the Personal Property Security Act (PPSA), which allows the use of personal property (including intellectual property rights) as collateral in securing loan obligations. All these laws demonstrate that innovation is at the center of the country's development policies.
At present, the implementing rules and regulations of the three laws have not been issued. Quisumbing Torres continues to monitor the issuance of the respective IRRs to ensure that companies are accurately informed of the available incentives, programs, and benefits provided by these laws and how the same can be maximized in furtherance of different business objectives.
Philippine Innovation Act
Following the PIA's publication on 22 July 2019, the law takes effect today, 6 August 2019. The PIA established the National Innovation Council (NIC), an inter-agency committee to develop the state's innovation goals, priorities, and long-term national strategy. The NIC, which is chaired by the President of the Philippines, is tasked to develop several important policies and initiatives, such as the National Innovation Agenda and Strategy Document, identification of Priority Areas for Innovation, Inclusive Innovation, MSME Innovation, Innovation Centers and Business Incubators, and Strategic Research, Development and Extension Programs, among others. Further, the NIC and its member government agencies are required to eliminate regulatory barriers to innovation and cut red tape to boost innovation efforts.
One of the notable programs under the PIA is the Innovation Fund, where grants will be issued to qualified entrepreneurs and enterprises that are engaged in developing innovative solutions benefiting the poor and the marginalized.
Specific to intellectual property, the PIA mandates the enforcement of the Intellectual Property Code of the Philippines (IP Code), as well as other relevant intellectual property legislations (e.g., E-Commerce Act, Technology Transfer Act, etc.), for the protection of the exclusive rights of scientists, inventors, and innovators to their intellectual property and creations. Further, the Intellectual Property Office of the Philippines (IPOPHL) is tasked to introduce reforms which seek to promote, streamline, and rationalize the registration of patents, trademarks, copyrights, industrial designs, and geographical indications among scientists, inventors, and innovators to ensure protection of innovation against misappropriation.
Under the PIA, the IPOPHL is required to report to the NIC the reforms it has introduced for (i) the streamlining and rationalization of administrative and registration procedures, and (ii) the programs it has undertaken to assist MSMEs in the registration of patents, trademarks, copyrights, industrial designs, and geographical indications, within six (6) months from the effectivity of the law and every year thereafter.
MSMEs should consider closely monitoring both reforms to be introduced by the IPOPHL, as well as the implementing rules and regulations of the PIA which are expected to be issued within sixty (60) days from the effectivity of the law, to ensure compliance with and to avail of the benefits and incentives provided under the law.
Innovative Startup Act
Following the ISA's publication on 22 July 2019, the law takes effect today, 6 August 2019 It introduces the Philippine Startup Development Program (PSDP), which shall be composed of programs, benefits, and incentives for startups and startup enablers. The law appoints the Department of Science and Technology (DOST), the Department of Information and Communications Technology (DICT), and the Department of Trade and Industry (DTI) as the lead agencies, with the DTI being specifically tasked to promulgate the rules and regulations for the efficient registration and assessment of startup enablers to be registered under the PSDP.
Essentially, the ISA will provide benefits and incentives for startups and startup enablers. A "startup" is defined as any person or registered entity in the Philippines which aims to develop an innovative product, process, or business model. On the other hand, a "startup enabler" refers to any person or registered entity in the Philippines registered under the PSDP that provides goods, services, or capital identified to be crucial in supporting the operation and growth of startups by the DTI in consultation with the DOST, DICT, and pertinent government and non-government organizations.
Some of the incentives and benefits which government agencies may be authorized to provide to startups and startup enablers that have passed their selection and application process are: (a) full or partial subsidy for the registration and cost in the application and processing of permits and certificates required for the business registration and operation of an enterprise with the appropriate local or national government agencies; (b) endorsement of the host agency for the expedited or prioritized processing of applications with other government agencies; and (c) grants-in-aid for research, development, training, and expansion projects, among others.
On Startup Ecozones and Startup Visas
Moreover, the ISA promotes the creation of Philippine Startup Ecozones (PSEs), which are special economic zones where startups and startup enablers are allowed to grow and develop through private, local government, and/or national government initiatives, such as the facilitation of registration in the PSEs of qualified startups and startup enablers. The applicable benefits and incentives which may be availed of in the PSEs shall be contained in the implementing rules and regulations to be promulgated by the Investment Promotion Agencies.
Finally, the ISA introduces the concept of Startup Visas, which the Department of Foreign Affairs (DFA) shall issue to foreign owners, employees, and investors of startups or startup enablers registered in the Philippines. Application for Startup Visas shall require an endorsement from a host agency, on top of the application requirements to be promulgated by the DFA. These Startup Visas shall have an initial five-year (5) validity and may be renewed or extended with a three-year (3) validity. The ISA likewise allows the issuance of multiple-entry interim Startup Visas to be issued for free to prospective startup owners, investors, or enablers valid for six (6) months to one (1) year. With the introduction of these Startup Visas, bearers of the same shall be exempt from securing an Alien Employment Permit from the Department of Labor and Employment (DOLE), subject to the implementing rules to be promulgated by the DFA, DOLE, and the Bureau of Immigration.
Startups and startup enablers should consider closely monitoring the issuance of the implementing rules and regulations of the ISA in order to avail of the benefits and incentives provided under the law, as well as the registration and assessment procedure to be registered and qualified under the PSDP and the PSE. Startup owners, employees, and investors should likewise monitor the issuance of the rules to be issued by the DFA for the application of Startup Visas.
Personal Property Security Act
Published on 23 August 2018, the PPSA officially took effect last 7 September 2018.
Before the passage of the PPSA, banks and other financial intermediaries generally prefer traditional forms of security (e.g., realty) when processing and granting loan applications. This previous set-up posed challenges to MSMEs. The PPSA remedies this by introducing key reforms through the introduction of a streamlined process in creating and perfecting security interests, as well as the establishment of an Electronic Registry by the Land Registration Authority.
Under the PPSA, a security interest over personal property is created through a security agreement. In creating a security interest, it is sufficient that the collateral be reasonably identified, whether in a general or specific manner. Further, the PPSA allows a security agreement to provide a security interest in future property; provided, that the security interest in such property will be created only when the grantor acquires rights in it or the power to encumber it.
The PPSA likewise simplified and harmonized the rules on creation, perfection, and enforcement of security interest over personal property. Prior to the PPSA, there were several key differences in the creation, perfection, and enforcement of personal properties used in a pledge contract or chattel mortgage. For example, to bind third persons, a pledge must be in a public instrument containing the description of the thing pledged, while in a chattel mortgage, registration in the Chattel Mortgage Registry was required.
In contrast, the PPSA only requires a signed written contract to create a security interest. To further bind third persons, the security interest may be perfected through any of the following means: (i) the registration of a notice with the Electronic Registry; (ii) possession of the collateral by the secured creditor; and (iii) control of investment property and deposit accounts.
In terms of enforcement, the PPSA now allows the secured creditor to sell or dispose the collateral, either in a public or private sale. Moreover, the debtor is now required by law to satisfy any deficiency after the proceeds of said sale or disposition have been collected.
As mentioned, the PPSA requires the establishment of the Electronic Registry to reduce the risks involved in banks accepting personal property as security. It shall provide electronic means for registration and searching of notices, which refer to registered information relating to a security interest or lien in personal property such as the (a) identity of the grantor by an identification number and the secured creditor by name; (b) address of the grantor and the secured creditor; (c) description of the collateral; and (d) payment (or arrangement) of the prescribed fees. It essentially allows any person to search and verify the status of personal property, specifically on whether it is already covered by an existing security agreement.
Finally, the law provides that the implementation of the PPSA is conditioned upon the establishment of the Electronic Registry, in consonance with the promulgation of the law's implementing rules and regulations.
Clients are encouraged to closely monitor ongoing developments as the implementing rules and regulations of the PPSA are expected to be released this August 2019. Further, those interested to use personal property as security should wait for the establishment and operation of the Electronic Registry before entering into security agreements that are governed by the PPSA because only when said registry is established will the PPSA fully take effect.