Canada: Balancing Blockchain Technology And Ontario Securities Laws

Last Updated: November 10 2017
Article by Mike Hollinger, Kris Miks and Marah S Smith

This article was co-authored by  Caitlin Choi, an articling student in the Toronto office.

Further to the Canadian Securities Administrator's (CSA) August 2017 Staff Notice (see our last update here), on October 17, 2017, the Ontario Securities Commission (OSC) granted an exemptive relief application with respect to the dealer registration requirements imposed by Ontario securities laws in order to permit an initial coin offering (ICO) by Token Funder Inc. (Token Funder), a Toronto-based blockchain technology company.

Token Funder was established to create a smart token asset management platform (STAMP), which is intended to, among other things, facilitate third-party issuers raising capital through the offering of blockchain-based securities. In addition, Token Funder also intends to provide token and coin management and governance services for issuers and, subject to regulatory approvals and / or exemptive relief orders, to facilitate token and coin transfers.

Token Funder will create an aggregate of 1 billion digital tokens through a smart contract on the Ethereum Blockchain (FNDR Tokens), 200 million of which will be offered to investors to fund the creation of its platform and subsequent transfers of FNDR Tokens, pursuant to available prospectus exemptions.

Unlike some ICOs, which provide coin holders no inherent rights, the FNDR Tokens will entitle the holders thereof to: (i) participate in the STAMP's future success, via distributions from Token Funder that result from the operation of its STAMP, if, as, and when determined by Token Funder's board, provided, that Token Funder is able to make such distributions without adversely affecting the STAMP; (ii) receive e-mail updates regarding the development of the STAMP, including the achievement of applicable milestones, audited financial statements and applicable disclosure required by applicable securities laws; and (iii) have certain voting rights in respect of the entities entitled to use the STAMP – although holders of FNDR tokens will not have voting rights in respect of Token Funder's governance or operation.

The OSC granted Token Funder exemptive relief for a period of 12 months with respect to the dealer registration requirements under Ontario securities laws, provided that, promptly following completion of the offering, Token Funder would seek to become a registrant and will not facilitate any capital-raising efforts through its STAMP prior to obtaining such status. The relief was granted pursuant to the CSA's regulatory sandbox initiative, which is designed to allow companies to obtain exemptive relief from securities laws that may be an impediment to innovative business models.

By allowing Token Funder to complete the offering in advance of registration, Token Funder is able to establish interest in its STAMP prior to devoting capital and resources to becoming a registrant. Notwithstanding the delay of the requirement, the OSC incorporated certain obligations to protect potential investors into the exemptive relief order, including:

  • A prohibition on the provision of advice by Token Funder or its representatives to any investor with respect to the FNDR Tokens;
  • A requirement for Token Funder to establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to manage the risks associated with its business in accordance with prudent business practices, including the Ethereum Blockchain, cybersecurity and conflicts of interest between Token Funder and its investors;
  • A requirement to provide full and complete disclosure to all prospective investors through an offering memorandum available on its website;
  • A requirement to conduct know-your-client and suitability reviews for each investor, including a comprehensive onboarding process to ensure, among other things, that investors have a detailed understanding of cryptocurrency and digital token offerings; and
  • A requirement to provide, in addition to any other reporting required by securities laws, the OSC with: (i) details of investor complaints received by Token Funder within 10 days of any such complaint, and (ii) quarterly reporting (within 10 days of the end of each quarter).

While the exemptive relief order granted in favour of Token Funder evidences the OSC's willingness to provide limited relief, it remains tied to a series of enhanced disclosure and reporting obligations. In addition, as with the exemptive relief granted to Impak Finance Inc. in connection with its ICO, the OSC made a point of emphasizing that its decision "should not be viewed as a precedent for other filers".

This decision comes in the wake of a global rise in popularity of ICOs over the past few years. More than $2.5 billion has been raised from ICOs in 2017 alone.1 As regulators in many jurisdictions continue to wrestle with the task of fitting blockchain technology within established regulatory frameworks, including securities laws, the CSA has expressed a desire to adapt the law to technological advances.

Both this decision and the decision released on August 16, 2017, in connection with Impak Finance Inc.'s ICO, provide a helpful indication that the CSA are willing to work with issuers to create a roadmap for ICOs. Notwithstanding the foregoing, the decisions do not ultimately address questions regarding the treatment of utility tokens under Canadian securities law. Going forward, as new tokens and coins continue to be brought to market, the blockchain community will be watching Canadian regulatory authorities closely to see how they strike a balance between encouraging innovation and protecting investors from fraudulent ICOs.  

Footnotes

1. Coindesk ICO Tracker, October 13, 2017.

2. Alternatively, Forbes reported on September 23, 2017, that nearly 2.3 billion dollars have been raised in ICOs: Chance Barnett, "Inside the Meteoric Rise of ICOs", Forbes, September 23, 2017.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
17 Oct 2018, Webinar, Toronto, Canada

Dentons and SheEO are coming together for an evening of #radicalgenerosity on October 17, 2018. Meet Vicki Saunders, Founder of SheEO, and learn about how SheEO is changing the landscape for female entrepreneurs.

17 Oct 2018, Webinar, Toronto, Canada

With the continued focus on Bill 148’s significant changes to the Employment Standards Act, Dentons’ Toronto Employment and Labour group is pleased to launch a new webinar series focusing on Bill 148.

17 Oct 2018, Seminar, Québec, Canada

Dentons is pleased to invite you to join us for a breakfast seminar as part of the Les Matinées Dentons series on issues relevant to you and your business.

 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions