Transforming growth factor-β (TGF-β) plays an important role in smooth muscle (SM) differentiation, but the downstream target genes regulating the differentiation process remain largely unknown. In this study, we identified olfactomedin 2 (Olfm2) as a novel regulator mediating SM differentiation. Olfm2 was induced during TGF-β-induced SM differentiation of human embryonic stem cell-derived mesenchymal cells. Olfm2 knockdown suppressed TGF-β-induced expression of SM markers, including SM α-actin, SM22α, and SM myosin heavy chain, whereas Olfm2 overexpression promoted the SM marker expression. TGF-β induced Olfm2 nuclear accumulation, suggesting that Olfm2 may be involved in transcriptional activation of SM markers. Indeed, Olfm2 regulated SM marker expression and promoter activity in a serum response factor (SRF)/CArG box-dependent manner. Olfm2 physically interacted with SRF without affecting SRF-myocardin interaction. Olfm2-SRF interaction promoted the dissociation of SRF from HERP1, a transcriptional repressor. Olfm2 also inhibited HERP1 expression. Moreover, blockade of Olfm2 expression inhibited TGF-β-induced SRF binding to SM gene promoters in a chromatin setting, whereas overexpression of Olfm2 dose dependently enhanced SRF binding. These results demonstrate that Olfm2 mediates TGF-β-induced SM gene transcription by empowering SRF binding to CArG box in SM gene promoters.