Canada: Public Statement And Recent Enforcement Action By The SEC Signals Crack Down On The ICO Rush

The United States Securities and Exchange Commission (SEC) Chairman Jay Clayton issued a public statement on December 11, 2017 providing his general views on cryptocurrencies and initial coin offerings (ICOs) and offering advice to prospective investors and market participants. Since then, the SEC has halted one ICO for conduct which constituted an unregistered securities offering and also suspended trading in a small cap stock that trades in digital coins and cryptocurrencies.

SEC Chairman Statement

Mr. Clayton's public statement acknowledged that many of the important questions in the cryptocurrency and ICO market – such as whether a product and offering are legal – require in depth analysis, and that the answers to such questions may differ depending on a number of factors. In his statement, Mr. Clayton did not seek to definitively answer these questions, but rather sought to offer his general views on the cryptocurrency and ICO market. He directed his initial comments at (i) "main street" investors, and (ii) market professionals (including broker-dealers, investment advisors, exchanges, lawyers and accountants) before continuing to discuss more broadly cryptocurrencies, ICOs and securities regulation.

(a) Considerations for "main street" investors

In the spirit of investor protection, Mr. Clayton cautioned "main street" investors about the risks associated with participating in the cryptocurrency and ICO markets. He cited the fact that no ICO to date has been registered with the SEC. Furthermore, he pointed out that many of the ICO and cryptocurrency markets span national borders and that, as a result, invested funds may travel overseas quickly without investors' knowledge and that the SEC may not be able to effectively pursue bad actors. Mr. Clayton also provided a list of "due diligence" questions that all "main street" investors should ask when considering whether to invest in cryptocurrency and ICO products.

(b) Considerations for market professionals

On ICOs: Mr. Clayton noted that, following the release of an investigative report by the SEC into the DAO (a copy of which can be found here), a number of market professionals have attempted to highlight the utility features of their proposed ICO in an effort to claim that the token or coin is not, in fact, a security. Consistent with the concerns raised by Canadian securities regulators in their notice from August 2017, as discussed in our August MarketCaps, he stated that many of these claims elevate "form over substance".

Mr. Clayton also reminded market participants that tokens and offerings which incorporate features and marketing efforts emphasizing the potential for profits based on the entrepreneurial or managerial efforts of others continue to contain the hallmarks of a "security" under U.S. law. Mr. Clayton indicated that, moving forward, he expects gatekeepers, including securities lawyers, accountants and consultants to focus on their responsibilities. He further urged market professionals to be guided by the principle of investor protection and, in particular, the protection of "main street" investors.

On cryptocurrencies: Mr. Clayton emphasized two points on cryptocurrencies:

  1. calling something a "cryptocurrency" does not mean that it is not a "security". Prior to launching a cryptocurrency or a product connected to the value of a cryptocurrency, promoters need to either (a) exhibit that the currency or product is not a security, or (b) comply with securities laws.
  2. brokers, dealers and other market participants that accept payment in cryptocurrencies, coordinate purchases of cryptocurrencies or otherwise use cryptocurrencies to facilitate securities transactions should exercise caution and not lose sight of anti-money laundering and "know your client" obligations.

(c) General discussion on cryptocurrencies, ICOs and securities regulation

Mr. Clayton also broadly outlined the concepts underpinning cryptocurrencies and highlighted some of their pros and cons. He stated that whether or not a cryptocurrency is beyond the jurisdiction of the SEC will depend on the characteristics and use of that particular asset. He noted that just as the SEC has a sharp focus on how U.S. dollar, euro and Japanese yen transactions effect the securities market, so too does the SEC have an interest in how cryptocurrency transactions effect the securities market.

Mr. Clayton also provided commentary on the ICO market and offered perhaps the clearest statement yet by a SEC representative about the regulatory implications of an ICO: "By and large, the structures of initial coin offerings that I have seen promoted involve the offer and sale of securities and directly implicate the securities registration requirements and other investor protection provisions of our federal securities laws."

Following this statement, Mr. Clayton highlighted the fact that he has asked the SEC's Division of Enforcement to police the ICO space vigorously and to recommend enforcement actions against those that conduct ICOs in violation of the federal securities laws.

SEC actions in light of Clayton's comments

Munchee Inc.

On December 11, 2017, the same day as the Chairman's comments, the SEC also announced it had issued an order that an ICO by a California startup constituted an unregistered security offering. The SEC intervened in an offering by Munchee Inc., a start-up that was attempting to raise capital through the issuance of its own cryptocurrency. Munchee, for its part, cooperated with the investigation, refunded the money it had received from investors in the prospective offering and also consented to the SEC order.

The press release by the SEC noted some of the factors that had persuaded it that Munchee was offering a security, pointing out that Munchee had emphasized to prospective investors that the tokens they would receive did not have a fixed value, but would increase due to the efforts by the company and others. Munchee also indicated to investors that it would create and support a secondary market for the exchange of its tokens. Collectively, these were taken to signal to investors that their investment would yield returns from the efforts of others, the hallmark of a "security".

While the SEC declined to take additional steps, such as levying a penalty, it noted that it did so because of (i) Munchee's cooperation and compliance upon the SEC intervening, and (ii) the lack of harm to investors, since no tokens had actually been issued. Implicit in that acknowledgement was the warning that other offerors may not get off so lightly, and there could be a serious bite to SEC sanctions if it deems it necessary.

Crypto Co.

On December 19, 2017, the SEC suspended trading of shares in Crypto Co., an over-the-counter issuer whose stock has surged more than 2700% this month. Crypto Co. had promoted itself as "the first and only reporting company offering a portfolio of digital assets, technologies and consulting services to the blockchain and cryptocurrency markets."

The SEC outlined its concerns relating to the "accuracy and adequacy of information in the marketplace about, among other things, the compensation paid for promotion of the company, and statements in Commission filings about the plans of the company's insiders to sell their shares of The Crypto Company's common stock." The trading suspension will be lifted on January 3, 2017.

Next Steps

For investors and offerors alike, who are interested in participating in or conducting ICOs, Clayton's statements and recent enforcement actions on both sides of the border (for Canada, see recent sanctions for contempt against those involved with Plexcoin, and related SEC emergency action) should underline the need for responsible practices. No longer can participants in ICOs and cryptocurrencies turn a blind eye to the existing securities regulatory framework. Accordingly, prior to entering into this exciting space, one should consult with a legal professional. Gowling WLG has already been working with organizations contemplating ICOs to determine whether or not Canadian securities laws apply to their ICOs and if so, how they can conduct their ICOs in compliance with Canadian securities laws.

We have also been engaged with securities regulators across Canada, through the CSA Regulatory Sandbox and otherwise, on issues relating to ICOs and other innovations in the fintech, securities crowdfunding and alternative finance space. While clear on the need to fulfil their regulatory mandate, Canadian securities regulators want to encourage innovation and facilitate capital raising by fintech businesses.

Organizations contemplating an ICO should consult with legal counsel – the following members of Gowling WLG's Capital Markets/Crypto team would be pleased to assist:

Gowling WLG is the only international law firm to be a partner and co-founding member of the Blockchain Research Initiative, a multi-million dollar research initiative into blockchain, which includes the Government of Canada, Bank of Canada, Nasdaq, the TMX Group, IBM and many others.

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.

Events from this Firm
7 Nov 2019, Seminar, Birmingham, UK

Providing content specifically tailored to the needs of GCs and Heads of Legal working in government organisations and their affiliates.

14 Nov 2019, Seminar, London, UK

Providing content specifically tailored to the needs of GCs and Heads of Legal working in government organisations and their affiliates.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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