On August 24, the Canadian Securities Administrators (CSA), an organization composed of Canada’s provincial and territorial securities regulators, released Staff Notice 46-307 Cryptocurrency Offerings, which addresses how Canadian securities laws may apply to cryptocurrency offerings – a category that includes initial token sales and initial coin offerings, cryptocurrency investment funds and the cryptocurrency exchanges that trade such products.
In determining whether or not an investment contract exists, businesses should apply the following four-prong test. Namely, does the ICO/ITO involve:
1. An investment of money
2. In a common enterprise
3. With the expectation of profit
4. To come significantly from the efforts of others
Securities law requirements that apply
Businesses issuing coins/tokens that are securities must identify and address fundamental securities law obligations, including the following:
Prospectus requirement or exemption
To date, no business has used a prospectus to complete an ICO/ITO in Canada. We anticipate that businesses looking to sell coins/tokens may do so under prospectus exemptions. Sales may be made to investors who qualify as “accredited investors” as defined under securities laws, in reliance on the accredited investor prospectus exemption. For retail investors who do not qualify as accredited investors, sales will typically need to be made in reliance on the offering memorandum (OM) prospectus exemption.
We are aware that some fintech businesses publish whitepapers for their ICOs/ITOs, which may describe things such as the fundraising goal, the business, the project for which capital is being raised, how many coins/tokens management of the business will retain and how long the offering will remain open. Although whitepapers are a form of disclosure document for investors, it is important to note that they are often not structured in the same way as prospectuses or OMs. Investors must be provided with a document that complies with the requirements of securities laws. Under securities laws, prospectuses and OMs have specific disclosure requirements and trigger certain ongoing obligations and other protections for investors. For example, investors can sue for misrepresentations by management of the business in prospectuses and OMs.
It should also be noted that investors may also have civil remedies against persons or companies that fail to comply with securities laws, including a right to withdraw from the transaction and/or damages for losses on the grounds that such transactions were conducted in breach of securities laws.
Unless relief is granted from the applicable securities regulatory authority, businesses relying on the OM prospectus exemption must meet all of the conditions of that exemption, including:
• Meeting the content requirements for the document;
• Obtaining a signed risk acknowledgement form from each investor;
• Complying with investor investment limits, as required;
• Providing audited annual financial statements and ongoing disclosure to investors, as required;
• Complying with resale restrictions, which will generally preclude coins/tokens from trading on cryptocurrency exchanges; and
• Filing reports of exempt distribution with the securities regulatory authorities.
Examples of material information to be disclosed in an OM are:
• A description of the business itself;
• The ecosystem on which the coin/token operates;
• Any minimum or maximum offering amounts;
• The intended use of proceeds;
• How long the offering will remain open;
• Features of the coins/tokens, including potential returns on investment, exit strategies and liquidity;
• How the coins/tokens will be valued on an ongoing basis;
• The number of coins/tokens that will be held by management compared to the number that will be offered for sale to the public;
• The timeline for achieving different milestones and any ongoing updates that will be provided;
• Management members’ identities and backgrounds, including any regulatory or legal proceedings against them;
• Remuneration paid or payable to the management team and/or any advisors; and
• All material risks of investing.
A fintech business is invited to contact the securities regulatory authority in the jurisdiction where its head office is located:
The BCSC Tech Team at TechTeam@bcsc.bc.ca
Mark Franko at Mark.Franko@asc.ca or Denise Weeres at Denise.Weeres@asc.ca
Dean Murrison at email@example.com or Liz Kutarna at firstname.lastname@example.org
Chris Besko at email@example.com
The OSC LaunchPad Team at firstname.lastname@example.org
The Fintech Support Team at email@example.com.
Susan Powell at firstname.lastname@example.org
Jane Anderson at Jane.Anderson@novascotia.ca