Convertible Note (Philippines)
CONVERTIBLE NOTE
Revised Corporation Code (RA 11232) — Securities Regulation Code (RA 8799) — Civil Code (RA 386)
This Convertible Note ("Note") is issued on [Note Date] by [Company Name] (SEC Reg. No. [Company SEC No.]) (the "Company"), in favor of [Investor Name], of [Investor Address] (the "Investor").
1. LOAN AND INTEREST
1.1 The Company promises to pay to the order of the Investor the principal sum of [Principal Amount], together with accrued interest at [Interest Rate] per annum (simple interest), computed from the date of this Note.
1.2 Interest shall accrue but shall not be payable in cash; it shall instead be added to the outstanding principal balance and converted to equity upon the Conversion Event, or repaid in cash at Maturity if not converted.
1.3 Documentary stamp tax at PHP 1.00 per PHP 200 of the Note principal under Section 179 of the NIRC (RA 8424) shall be paid by the Company within 5 days after the close of the month of issuance.
2. MATURITY
2.1 Unless earlier converted or repaid, this Note shall mature on [Maturity Date] (the "Maturity Date"). At Maturity, the outstanding principal plus accrued interest shall, at the Investor's election: (a) convert into the most recently issued class of shares of the Company at the conversion price determined under Section 3; or (b) be repaid in cash.
3. CONVERSION
3.1 Qualifying Financing Conversion. Upon the closing of a Qualifying Financing — a priced equity round with aggregate gross proceeds of at least [QF Threshold] — the outstanding principal and accrued interest shall automatically convert into the same class of shares issued in the Qualifying Financing.
3.2 Conversion Price. The price per share at conversion shall be the lower of: (a) the Qualifying Financing price per share multiplied by (1 minus the Conversion Discount of [Conversion Discount]); or (b) the Valuation Cap of [Valuation Cap] divided by the Company's fully diluted outstanding shares immediately prior to the Qualifying Financing.
3.3 DST on Conversion. Upon conversion, documentary stamp tax at PHP 1.00 per PHP 200 of the issue price of shares under Section 175 of the NIRC (RA 8424) shall be paid by the Company within 5 days after the close of the month of conversion.
4. EVENTS OF DEFAULT
4.1 Events of Default include: (a) failure to repay at Maturity; (b) filing by or against the Company of a rehabilitation or insolvency petition under FRIA (RA 10142); (c) material misrepresentation by the Company. Upon default, the Investor may declare the entire outstanding amount immediately due and payable.
5. GOVERNING LAW
5.1 This Note is governed by the laws of the Philippines (RA 386, RA 11232, RA 8799). Disputes shall be resolved by the Regional Trial Court of Makati City or by PDRCI arbitration under the ADR Act (RA 9285).
IN WITNESS WHEREOF, the Company has caused this Note to be executed by its duly authorized officer on the date first above written.
[Company Name]
Issuing Corporation (Authorized Officer)
[Investor Name]
Investor (Acknowledged)
Issuing Corporation (Authorized Officer)
________________
Signature
Investor
________________
Signature
What Is a Convertible Note (Philippines)?
A Convertible Note in the Philippines governs the relationship it concerns, fixing the parties' respective duties and the terms on which they deal.
The Securities and Exchange Commission (SEC) of the Philippines regulates the issuance of convertible notes by domestic corporations. Under SEC Memorandum Circular No. 3-2021 on Crowdfunding and SEC Memorandum Circular No. 14-2019 on Startup Ecosystems, convertible notes issued to qualified investors in private placements may qualify for exemptions from full securities registration under the Securities Regulation Code (SRC, RA 8799), Section 10. Failure to comply with SRC registration or exemption requirements exposes the issuer to administrative sanctions by the SEC.
The Bureau of Internal Revenue (BIR) treats the initial issuance of a convertible note as a loan subject to documentary stamp tax (DST) under Section 179 of the National Internal Revenue Code (NIRC, RA 8424) at PHP 1.00 per PHP 200 of face value. Upon conversion, the issuance of shares triggers a separate DST at PHP 1.00 per PHP 200 of the original issue price of the shares under NIRC Section 175.
A Convertible Note differs from a direct equity investment in that the investor does not hold shares — and therefore does not have voting rights, pre-emptive rights under RA 11232 Section 38, or dividend rights — until conversion. The note includes a conversion discount (typically 10–25%) or a valuation cap that determines the price per share at conversion, rewarding early investors for the risk of early-stage financing.
The Supreme Court of the Philippines has not yet issued landmark decisions specifically on convertible note enforceability, but general principles from Civil Code contract law and the SRC apply. Philippine startup practice has adopted the convertible note structure from US practice, adapted for Philippine SEC and BIR requirements.
The legal framework governing the Convertible Note (Philippines) in Philippines draws on several key statutes and regulatory bodies. Under Philippine law, the Civil Code of the Philippines (Republic Act No. 386) governs contractual obligations. The Revised Corporation Code (Republic Act No. 11232) regulates corporate entities through the Securities and Exchange Commission (SEC). The Labor Code of the Philippines (Presidential Decree No. 442) and Department of Labor and Employment (DOLE) govern employment matters. The Data Privacy Act of 2012 (Republic Act No. 10173) and the National Privacy Commission (NPC) protect personal data. The Bureau of Internal Revenue (BIR) administers tax obligations under the National Internal Revenue Code. Parties executing a Convertible Note (Philippines) in Philippines should confirm the document reflects current law, including any amendments enacted since the original drafting date. The Revised Corporation Code (RA 11232, 2019) sets the foundational requirements.
When Do You Need a Convertible Note (Philippines)?
A Convertible Note in the Philippines is needed in the following specific situations.
A Convertible Note is the preferred instrument when an early-stage Philippine startup raises seed or pre-Series A financing from angel investors or venture capital funds and the parties want to defer the valuation negotiation to the next priced equity round. Fixing a valuation at the pre-revenue stage risks undervaluing the company and creating unfavorable cap table structures; a Convertible Note defers this negotiation to a future round led by institutional investors.
A Convertible Note is needed when a Philippine corporation needs bridge financing between funding rounds and expects a larger Series A or Series B investment within 12–24 months. The convertible structure allows the bridge investor to receive a discount on the future round's share price (the conversion discount) as compensation for providing capital before valuation is established.
A Convertible Note is required by venture capital funds registered with the SEC's Capital Market Participants Registry System (CMPRS) when investing in Philippine companies where the founders and investors agree to convert the debt into equity at the Series A round's price per share, less the negotiated discount of typically 15–25%.
A Convertible Note is needed when a foreign investor wishes to invest in a Philippine corporation but the foreign equity cap applicable to the relevant industry under the Foreign Investments Act (FIA, RA 11647) and the Foreign Investments Negative List limits the investor's shareholding. The investor holds the note as debt until the foreign equity cap issue is resolved or the company restructures.
Philippine technology companies registered under the Philippine Economic Zone Authority (PEZA) or the Board of Investments (BOI) frequently use convertible notes for pre-commercial-launch financing, as the note structure avoids premature changes to the SEC-registered shareholding structure required for fiscal incentives.
What to Include in Your Convertible Note (Philippines)
A valid Philippines Convertible Note must contain the following essential elements.
Parties, Corporate Authority, and SEC Compliance: Full names of the investor-lender and the corporation-issuer (SEC Registration Number, principal office). Include a Board resolution under RA 11232 Section 22 authorizing the note issuance and a representation that the note qualifies for an SRC Section 10 exemption from securities registration (e.g., Exempt Transaction under SRC Section 10.1(k) for transactions involving fewer than 20 investors).
Principal Amount and Interest Rate: The principal in Philippine Peso (PHP ₱). The interest rate per annum — typically 6–10% for Philippine convertible notes — which accrues but is usually unpaid in cash and instead added to the conversion amount. State the interest compounding method (simple or compound) and the accrual start date.
Maturity Date: The date by which, if no Qualifying Financing has occurred, the principal plus accrued interest must either be repaid in cash or converts into equity at the investor's option. Philippine convertible notes typically have 18–24 month maturity periods.
Conversion Mechanics — Qualifying Financing Conversion: Define the Qualifying Financing threshold (e.g., minimum aggregate proceeds of PHP 20,000,000 in a single equity round). Upon Qualifying Financing, the note converts automatically into the same class of shares issued in that round at a price per share equal to the lower of: (a) the Qualifying Financing price multiplied by (1 minus the Conversion Discount); or (b) the Valuation Cap divided by the fully diluted capitalization.
Conversion Discount and Valuation Cap: State the Conversion Discount (e.g., 20%) and the Valuation Cap (e.g., PHP 100,000,000 pre-money valuation). These are the two economic terms that determine investor return on conversion.
Documentary Stamp Tax: Specify which party bears the DST under NIRC Section 179 (PHP 1.00 per PHP 200 of face value) upon issuance and the separate DST under NIRC Section 175 upon conversion into shares.
Events of Default and Repayment: Non-payment at maturity, insolvency filing under FRIA (RA 10142), change of control without investor consent. Upon default, the outstanding principal plus accrued interest becomes immediately due and payable at the investor's election.
Governing Law: Philippine law, with disputes submitted to the SEC (for corporate governance issues) or the Regional Trial Court, Makati or Taguig Branch, with option for PDRCI arbitration under the ADR Act (RA 9285).
Additional compliance elements for a Convertible Note (Philippines) used in Philippines include: Under Philippine law, the Civil Code of the Philippines (Republic Act No. 386) governs contractual obligations. The Revised Corporation Code (Republic Act No. 11232) regulates corporate entities through the Securities and Exchange Commission (SEC). The Labor Code of the Philippines (Presidential Decree No. 442) and Department of Labor and Employment (DOLE) govern employment matters. The Data Privacy Act of 2012 (Republic Act No. 10173) and the National Privacy Commission (NPC) protect personal data. The Bureau of Internal Revenue (BIR) administers tax obligations under the National Internal Revenue Code. Forms-legal.com provides this template as a starting point for Philippines-compliant documentation.
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note = {Free legal document template. Based on Revised Corporation Code (RA 11232, 2019)}
}Also available for these jurisdictions:
Frequently Asked Questions
A Convertible Note may be classified as a security under Section 3.1 of the Securities Regulation Code (SRC, RA 8799) if it is offered and sold to the public or to 20 or more investors. If classified as a security, the convertible note must either be registered with the SEC or qualify for an exemption under SRC Section 10 (Exempt Transactions) or Section 9 (Exempt Securities). Most Philippine startup convertible notes rely on the SRC Section 10.1(k) exemption for transactions not involving a public offering where the number of investors does not exceed 19. Issuers must file an Exempt Transaction Report with the SEC within 30 days of the sale. Failure to register or claim an exemption subjects the issuer to SEC administrative sanctions, fines, and potential criminal liability under SRC Section 73 for fraudulent transactions.
If a Philippine startup fails before a convertible note matures or converts, the noteholder is a creditor of the corporation and has priority over equity shareholders in the distribution of assets in corporate dissolution or liquidation under the Financial Rehabilitation and Insolvency Act (FRIA, RA 10142, 2010). In voluntary liquidation under FRIA Section 90, the noteholder files a claim with the Liquidator appointed by the Regional Trial Court (RTC). However, the noteholder ranks after secured creditors, labor claims under Article 110 of the Labor Code, government tax claims (BIR and LGU), and preferred creditors under the Civil Code Article 2244. As an unsecured creditor, the noteholder typically recovers only a fraction of the principal if the startup's assets are insufficient to cover senior claims. The risk of total loss in early-stage startup failure is why convertible note investors require conversion discounts and valuation caps as compensation.
When a Philippine Convertible Note converts into equity shares, the conversion triggers documentary stamp tax (DST) under Section 175 of the NIRC (RA 8424) at PHP 1.00 for every PHP 200 of the original issue price of the shares issued upon conversion. The corporation must file BIR Form 2000 and pay the DST within 5 days after the close of the month in which the conversion occurs. The investor-now-shareholder does not recognize a taxable gain on conversion itself; capital gains tax under NIRC Section 24(C) arises only when the shares are subsequently sold. If the shares are sold to a buyer other than through the Philippine Stock Exchange (PSE), a 15% capital gains tax applies to the net capital gain under NIRC Section 24(C). Shares sold through the PSE are instead subject to stock transaction tax at 0.6% of gross selling price under NIRC Section 127.
A Philippine Convertible Note requires a Board of Directors resolution under the Revised Corporation Code (RA 11232, Section 22) authorizing the corporation to incur the debt and granting a specific officer the authority to execute the note. For the conversion feature — which involves the future issuance of new shares — the Board must also verify that authorized but unissued shares are available or, if not, that the stockholders have approved an increase in authorized capital stock under RA 11232, Section 37. An increase in authorized capital stock requires approval of at least 2/3 of the outstanding capital stock and filing with the SEC accompanied by the Amended Articles of Incorporation. Philippine startup practice often pre-authorizes a conversion share pool by increasing authorized capital stock before closing the convertible note round to avoid delays at conversion.
A valuation cap in a Philippine Convertible Note is the maximum company valuation at which the noteholder's debt converts into equity, regardless of the actual valuation set in the Qualifying Financing round. If the Qualifying Financing values the company at PHP 200,000,000 but the valuation cap in the note is PHP 100,000,000, the noteholder converts at the PHP 100,000,000 valuation, effectively receiving twice as many shares per peso invested as the new investors in the Qualifying Financing round. The valuation cap protects early investors from excessive dilution when the company's valuation has increased substantially between the note issuance and the conversion event. Philippine convertible notes typically set the valuation cap based on a negotiated pre-money valuation agreed between the investor and the founder at the time of note issuance, without a formal independent valuation required by the SEC at the seed stage.
This template is provided for informational purposes only and does not constitute legal advice. Laws vary by jurisdiction and change over time. Consult a qualified attorney for advice specific to your situation.Full disclaimer
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