Canada: Read This Before Your ICO: Exploring The SAFT Framework For Compliant Token Sales In Canada


To date in 2017, technology startups have raised over US$3 billion through more than 200 initial coin offerings (ICOs). As discussed in our August 30 Update, Initial Coin Offerings in Canada: The CSA Weighs In, and our September 12 Update, Cryptocurrencies: Further Legal Developments, ICOs are catching the attention of investors and securities regulators in Canada and abroad. While blockchain and cryptocurrencies carry the promise of creating new growth opportunities for startup ventures and transforming the financial services industry, undertaking an ICO can be fraught with regulatory risk. The Simple Agreement for Future Tokens (SAFT) has been developed as one way to potentially mitigate this risk by bifurcating the securities and tokens components of a transaction while preserving many of the benefits associated with ICOs.

While we are not aware of any Canadian-based issuers using the SAFT model to complete an ICO, it is gaining some traction in the US. For example, Filecoin, a blockchain-based storage network and cryptocurrency, incorporated the SAFT into its ICO process in raising over US$257 million this past summer. Purchasers entered into SAFTs that entitled them to receive tokens that will be redeemable for electronic storage space provided through the Filecoin platform in the near future while being immediately tradeable on cryptocurrency exchanges. Similarly, tZERO, a company developing blockchain technologies for capital markets applications, is beginning its SAFT-modelled ICO on December 18, 2017, and expects to raise over US$200 million. Whether issuers adopting this untested model will ultimately avoid regulatory oversight remains to be seen.

What is an ICO?

An ICO is a new way for early stage companies to attract investment in which the issuer designs and sells digital currency. Unlike a traditional initial public offering, the "tokens" sold in an ICO usually do not represent an ownership stake in the organization. Instead, they are digital assets used in connection with applications and communities ("Token Networks"). To date, tokens are most often intended to represent the right to a certain value of the future goods or services the issuer plans to develop – such tokens are usually known as "utility tokens." Unlike utility tokens, "investment tokens" provide investors with economic and voting rights akin to shares. Investment tokens, like those sold in the Digital Autonomous Organization (DAO) ICO,1 are clearly securities and will not be discussed further in this article.

Suppose that, by way of a truly Canadian example, Canadian Tire was born in 2017. Before its retail operations existed, the company decided to sell Canadian Tire money as "tokens" to the public online (at that stage, "Non-Functional Tokens"). Canadian Tire, as a Token Network, would use the proceeds from that sale of Non-Functional Tokens to develop its retail business and, once launched, the tokens would be redeemable for household goods and automotive services (at that stage, "Functional Tokens"). The value of the Non-Functional Tokens may be tied to expectations of a future functional Canadian Tire business in which tokens become redeemable for goods and services.

Are Tokens Securities?

According to the Canadian Securities Administrators (CSA), tokens may be considered securities and if so trigger the same rigorous disclosure and registration requirements that apply to securities under Canadian securities law, such as shares of a public company. The purchasers of Non-Functional Tokens who want to resell the tokens in the secondary market may be subject to restrictions on transfer or dealer registration requirements. These regulatory obligations would significantly diminish the benefits of raising money through an ICO such as speed, cost, and liquidity.

In Canada, as reiterated in the CSA Staff Notice 46-307 on Cryptocurrency Offerings dated August 24, 2017 (the "Cryptocurrency Notice"), a token may be considered a security if it satisfies a well-established four-part test (the "Securities Test"), which entails determining whether the token involves

  1. an investment of money,
  2. in a common enterprise,
  3. with an expectation of profit,
  4. which comes significantly from the efforts of others.

However, the CSA stressed that every ICO is unique and must be assessed on its own characteristics. Tokens do not fit neatly into the judicial framework for determining whether something is a security, and other factors, including policy considerations, may be taken into account.

The Cryptocurrency Notice suggested it is possible some kinds of Functional Tokens would not be considered securities when it said that "...if an individual purchases coins/tokens that allow him/her to play video games on a platform, it is possible that securities may not be involved." In contrast, "...if an individual purchases coins/tokens whose value is tied to the future profits or success of a business [i.e., a Non-Functional Token], these will likely be considered securities."

Non-Functional Tokens

Based on the limited regulatory guidance provided to date, Non-Functional Tokens sold to the general public in a process called the Direct Token Presale will likely be deemed securities under the Securities Test.

The first two parts of the Securities Test – (i) an investment of money and (ii) in a common enterprise – would fairly clearly be met in the average sale of Non-Functional Tokens for a Token Network. The third part of the Securities Test – (iii) an expectation of profit – would also likely be satisfied as the Token Network would typically sell Non-Functional Tokens to purchasers at a discount to their future expected value, such that regulators may determine purchasers have a manifest expectation of profit. The fourth part of the Securities Test – (iv) which comes significantly from the efforts of others – may also be satisfied as the Non-Functional Tokens are sold to the public before the developers have produced a functional network. The Non-Functional Tokens arguably have no utility as their value depends on the efforts of developers to successfully launch the Token Network.

In addition to the probable result of applying the Securities Test to the characteristics of Non-Functional Tokens, public interest considerations may encourage the regulators to characterize Non-Functional Token as securities given, in most cases, they are clearly purchased for investment or speculative purposes. As Non-Functional Tokens sold in Direct Token Presales lack intrinsic value, there is greater danger of promoter fraud and of purchasers misunderstanding the investment risk, and therefore greater need to impose regulatory requirements to protect the investing public.

Functional Tokens

In contrast to Non-Functional Tokens, Functional Tokens appear to be less likely to be considered securities because of parts (iii) and (iv) of the Securities Test. With respect to part (iii), there may be no "expectation of profit" for Functional Tokens; instead, many purchasers may have an expectation of utility because of the now functional marketplace in which the tokens can be redeemed for products or services. Purchasers' expectations for use of the tokens are comparable to that of purchasers of foreign currency who intend to use such currency to buy goods and services internationally. With respect to part (iv), the value of the Functional Tokens is not tied to future utility that comes "significantly from the efforts of others" (e.g., developers); the value largely depends on market factors in the existing functional marketplace. Finally, the policy concerns previously mentioned are likely less acute, since Functional Tokens typically have a transparent, intrinsic value in fiat currency and are less likely to be purchased as investments given their immediate functionality.

The SAFT Framework

Based on the Simple Agreement for Future Equity (SAFE) commonly used in venture capital, the SAFT model attempts to mitigate the risk of utility tokens being deemed securities. A SAFT transaction operates as follows:

  1. The developers of the Token Network publish an operational plan for their Token Network, usually in a peer-reviewed whitepaper.
  2. Instead of advertising the sale of Non-Functional Tokens to the general public, the Token Network seeks investment from accredited investors who are eligible to purchase securities on a prospectus-exempt basis. The SAFTs operate as investment contracts between developers and accredited investors, providing investors with the right to receive Functional Tokens in the future when the Token Network becomes operational.
  3. The developers use the funds raised through the SAFTs to create a functional Token Network.
  4. When the network becomes operational, the Token Network distributes Functional Tokens to its investors as specified in the SAFTs. Once the Token Network is functional, investors and developers may then be able to freely trade the tokens on the assumption they will not be viewed as securities at that point.

Unlike the Direct Token Presale model, the SAFT framework aims to separate the investment contract (security) and Functional Token (non-security) components of the transaction. At the Non-Functional Token stage, the issuer raises money in compliance with securities laws through an investment contract (the SAFT) with accredited investors. At the Functional Token Stage, the Token Network distributes Functional Tokens to accredited investors which can be freely traded over trading platforms or otherwise.

Concerns with the SAFT Framework

Unfortunately, the SAFT-modelled ICO is not a silver bullet and it is far from clear that Functional Tokens will necessarily be exempt from regulation as securities.

First, as indicated in the Cryptocurrency Notice, application of Canadian securities laws to tokens will depend on the particular characteristic of each token and the circumstances in which it was issued. While it may be the case that some Functional Tokens could be exempt from regulation, it does not necessarily follow that all of them will be. Therefore, using a SAFT to ensure tokens are only issued to retail investors as Functional Tokens may not be determinative of whether regulators believe the tokens are securities. It also seems the details and context of the use of SAFTs in an ICO will likely play a role in the characterization of its tokens. Embellished promotional materials, a prevalence of speculators or unreasonable token pricing (i.e., at a deep discount to enhance the expectation of profit) increase the risk that tokens sold under a SAFT framework would be deemed securities.

Second, the bifurcation of the SAFT investment and the sale of Functional Tokens may be more complicated than expected. A Token Network's developers may unintentionally promote their platform to both accredited investors and potential token users. For instance, promotional material and messages targeted at accredited investors may be received by potential purchasers of Functional Tokens, creating an expectation of profit and influencing their buying decisions. Furthermore, while the lion's share of developer efforts may typically occur before the distribution of Functional Tokens, many developers continue to maintain, improve and further develop the Token Network throughout its lifetime. These activities may be necessary for a successful network and may trigger the fourth prong of the Securities Test – relating to the efforts of others – with regard to the Functional Tokens.

Third, SAFTs may hinder liquidity and create perverse incentives. Reliance on the accredited investor exemption subjects investors to a "closed system" of securities regulation and restrictions on trading, precluding the resale of SAFTs to retail investors and eliminating many of the most appealing characteristics of ICOs generally. The SAFT structure may also encourage initial investment from speculators who are solely interested in short-term gains. After holding the relatively risky and illiquid SAFT investment contract during the development phase, investors may be eager to sell Functional Tokens quickly and pressure developers to focus on a profitable token sale rather than a high-quality Token Network.

All of these factors underline the biggest potential problem with SAFTs - that the attempted bifurcation of the security and non-security portions of the transaction will not necessarily affect how regulators will assess the transaction. An issuer could follow the SAFT framework only to find that regulators do not treat the sale of a token differently at the Non-Functional and Functional Token stages. For instance, in September 2017, Waterloo-based Kik Interactive Inc. did not allow Canadians to participate in the public sale of KIN, a Functional Token that would be used as currency on its existing messaging app, which the OSC had apparently determined qualified as a security.


ICOs are a novel way to raise capital and their use presents securities law quandaries in Canada. While the SAFT model appears to be an improvement on the Direct Token Presale, its impact on the treatment of tokens under Canadian regulation remains unclear. At this point, it is not at all clear that SAFTs could be used in Canada to reliably eliminate the risk that tokens issued in an ICO will be characterized as securities. We will continue to track developments related to the regulation of ICOs and the use of SAFTs as this method of fundraising evolves.


1 See our August 30 Update, Initial Coin Offerings in Canada: The CSA Weighs In. The DAO was a digital decentralized autonomous organization that raised over US$150 million through an ICO. An anonymous hacker exploited a flaw in the tokens' code stealing approximately US$50 million of the tokens sold to investors. The U.S. Securities and Exchange Commission issued a report focused on the ICO and concluded the DAO tokens were securities.

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.

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

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

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
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 (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

To Use 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.


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.


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