Canada: Canadian Securities Regulators Publish Further Guidance On Token Offerings

On June 11, 2018, the Canadian Securities Administrators (CSA) published a further Staff Notice [PDF] regarding the securities law implications of initial coin offerings and initial token offerings (generally referred to by the CSA as token offerings). This guidance amplifies previous warnings by Canadian securities regulators that most token offerings are subject to Canadian securities laws and that regulators will continue to take enforcement action against projects and businesses that engage in token offerings without complying with applicable securities laws.

Key takeaways

  • The Staff Notice sends a clear signal that Canadian securities regulators are monitoring the crypto-asset space very closely and understand commonly used token offering models, including structures that may have been adopted to minimize the application of Canadian securities laws. In particular, by explicitly addressing offerings via Simple Agreement for Future Tokens (SAFTs), through air drops or from foreign jurisdictions, the Staff Notice signals that regulators believe projects using these structures could nonetheless be subject to Canadian securities laws.
  • The CSA’s approach is generally consistent with the approach taken by the U.S. Securities and Exchange Commission (the SEC), namely, that most token offerings are subject to applicable securities law. Further, consistent with statements by the SEC, the CSA is clearly directing a message at lawyers and other professional advisors to ensure that clients receive appropriate advice regarding intended token offerings.
  • The Notice arguably over-emphasizes token purchasers’ reasonable expectation of profit in acquiring tokens as an indicator that offering is an investment contract. One of the innovations of crypto-currency is the creation of economic incentives for participation in a protocol or platform in a way that benefits the network or collective. Bitcoin, for example, exists only because miners have an incentive to validate transactions and in the process, secure the network. Respectfully, an expectation of profit should not be determinative in a securities law analysis; otherwise, securities regulators would have jurisdiction over any investment in any tangible or intangible asset that is made with an expectation of profit.
  • There is no suggestion that new regulation will be forthcoming to address token offerings. The implication is that CSA members expect Canadian businesses undertaking projects involving tokens to engage with counsel and regulators at an early stage and to comply with existing regulatory requirements (to the extent they apply to token offerings). This will undoubtedly frustrate many in the industry who regard the regulatory sandbox and exemptive relief model as undesirable and would prefer more clearly defined and tailored approaches to the regulation of token offerings.

Indicators of an “investment contract”

The Staff Notice identifies a number of situations that may indicate that the token offering is an “investment contract” subject to securities laws, including:

  • The token is for use in a platform that is still under development.
  • The token is not immediately delivered.
  • The issuer offers free tokens or other benefits to promoters of the offering.
  • The stated purpose of the offering is to raise capital to develop the platform or support the value of the token.
  • Management of the issuer retains a significant number of unsold tokens as compensation.
  • The issuer suggests the tokens can be a currency or have broad utility, but there is no evidence of widespread adoption.
  • Management of the issuers suggests they have special expertise that will increase the value of the token.
  • There is a fixed supply of tokens or access to tokens will be limited in some fashion.
  • The issuer permits purchases of tokens in excess of the purported utility of the token.
  • Marketing of the offering targets purchasers who would not reasonably be expected to use the platform or product.
  • Management states or implies that the tokens will increase in value, or encourages others to make such statements.
  • There is a reasonable expectation that the tokens will trade on a crypto-asset trading platform or will otherwise be freely tradeable.

The Staff Notice puts particular emphasis on trading in the secondary market. CSA staff will examine white papers and statements in other media, such as messaging platforms, community meetups and online videos for messaging regarding secondary trading of tokens. In addition, CSA staff will take into account third-party representations concerning secondary trading that have been explicitly or implicitly endorsed by the issuer or management.

The Staff Notice also identifies certain factors that may indicate that the offering is not an investment contract:

  • Tokens are distributed for free, though this is stated with the proviso that a distribution of free tokens as part of an overall sale of an ancillary product or service may involve an investment of money and be characterized as a security.
  • The tokens are not fungible and have unique characteristics.
  • A continuous or unlimited supply of tokens.
  • The tokens have a fixed value that does not change with time or changes based on non-commercial factors.

CSA staff emphasize, however, that each offering must be analyzed on its own facts and none of the above factors is determinative as to whether an offering is, or is not, an offering of securities.

Other key themes

  • Utility tokens – The Staff Notice states that “most of the offerings of tokens purporting to be utility tokens that we have reviewed to date have involved the distribution of a security, namely an investment contract.” A token may have utility and also be a security.
  • Definition of “security” – A token may fit within other branches of the definition of “security” under securities legislation, not just the widely cited “investment contract” branch.
  • SAFTs and multiple step transactions – With respect to SAFTs and other multi-step transactions involving tokens, tokens delivered at subsequent steps may be a security, even if they have “utility,” because they continue to have features of an investment contract or have other security-like attributes. The Staff Notice expressly states that the CSA “will have concerns where a multiple step transaction is used in an attempt to avoid securities legislation.”
  • Legal counsel and Regulatory Sandbox – The Notice encourages businesses with proposed offerings of tokens to consult qualified legal counsel. The Notice also encourages businesses to contact Canadian securities regulators through the CSA Regulatory Sandbox.
  • Jurisdictional issues – The Staff Notice notes that securities law requirements may apply to token offering activities “regardless of where investors are located.” It emphasizes that Canadian securities regulators may have jurisdiction over transactions involving investors outside of their jurisdictions where there is a “real and substantial connection” between the transaction and Canada.
  • Ongoing enforcement activity – The Notice advises that CSA members are actively investigating token offerings to identify “past, ongoing and potential future violations of securities laws or conduct in the capital markets that is contrary to the public interest.”

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 Mondaq.com.

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
Davies Ward Phillips & Vineberg
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Davies Ward Phillips & Vineberg
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