Canada: CSA Provides Guidance On Securities Law Implications For Token Offerings

On June 11, 2018, the Canadian Securities Administrators (the "CSA") issued CSA Staff Notice 46-308 — Securities Law Implications for Offering of Tokens (the "Notice"). The Notice provides additional guidance on the applicability of securities laws to offerings of coins and tokens, including those commonly referred to as "utility tokens." The Notice provides examples of situations where the CSA has determined that the offering is a security and draws special attention to establishing the criteria of investment contracts. The Notice also advises businesses to consult qualified securities legal counsel about the potential application of, and possible approaches required to comply with, securities legislation.

Background

Cryptocurrencies are increasingly coming within the purview of securities regulators. In August 2017, the CSA published Staff Notice 46-307 — Cryptocurrency Offerings (SN 46-307), which confirmed that many cryptocurrency offerings involve the sales of securities.

Since the publication of SN 46-307, the CSA Staff has engaged with numerous businesses, and their advisors, who wish to complete offerings of coins or tokens. From their discussions, the CSA found that most of the offerings met the criteria for a security. The current Notice supplements SN 46-307, and attempts to provide additional guidance to businesses who may find themselves having to adhere to securities regulations. Specifically, the Notice (1) provides examples of situations where a token may be subject to securities laws, and (2) addresses multiple step token offerings.

Key Points of the Notice

When an offering of tokens may involve an offering of securities

The Notice states that a token or coin may fall within the definition of a "security" if it constitutes an investment contract. In determining whether the offering is that of an investment contract, a purposive interpretation that includes considering the objective of investor protection should be used. Additionally, businesses and their advisors are directed to apply the case law interpretation of investment contract, which includes considering whether the offering involves: (1) an investment of money, (2) in a common enterprise, (3) with the expectation of profit, (4) to come significantly from the effort of others.

The Notice stressed that every offering is unique and must be assessed on its own characteristics. Businesses and their advisors should asses not only the technical characteristics of the token, but the economic realities for the offering as a whole, with a focus on substance over form.

Examples of where a token may constitute an investment contract

The Notice provides illustrative examples of situations in which tokens might meet certain investment contract criteria. The examples presented in the Notice should not be used as a mechanical checklist, instead businesses and their advisors should complete a meaningful analysis based on the totality of the circumstances of the offering.

The Notice draws particular attention to situations involving utility tokens. The CSA received submissions that proposed offerings of utility tokens do not involve securities because the tokens have a specific function, such as in software or an online platform. However, the Notice states that most of the tokens the CSA assessed involved the distribution of a security based on the application of case law. Therefore, the fact that a token has utility is not determinative as to whether the offering involves the distribution of a security. For example, looking at whether the purchaser of the tokens has an intention to sell them on a secondary platform or trading market may be indicative of an expectation of profit under the investment contract criteria.

Offering of tokens that are structured in multiple steps

The Notice also provides that securities regulations may apply to offerings of tokens that are structured in multiple steps. The Notice outlines an example of a multiple-step transaction and provides guidance as to how securities law may apply.

Step 1: The purchaser agrees to contribute money in exchange for a right to receive tokens at a future date. A "simple agreement for future tokens," or "SAFT," typically governs the future transaction. At this step, there is usually a distribution of a security — specifically, the right to a future token. If there is a security at this stage, issuers typically rely on a prospectus exemption.

Step 2: The token is delivered to the purchaser, as outlined in the SAFT. At this step, the issuer has generally represented that the software or platform is built or the goods or services are available, and the token is functional. The CSA states that it may consider that a token delivered at this second step or a later step is a security, despite the fact that it may have some utility. This is because the token likely fulfils the criteria of an investment contract or has other security-like attributes, such as a profit sharing interest.

Complying with securities legislation

The Notice acknowledges that trends in the cryptocurrency industry are evolving quickly and encourages businesses and their advisors to consult qualified securities legal counsel about the potential application of, and approaches to complying with, securities legislation. Applicable securities law requirements include, among other things, reliance upon available prospectus requirements and related resale restrictions as well as compliance with dealer registration requirements. The Notice also recommends that businesses explore possible flexible approaches to complying with securities laws, including time-limited exceptive relief from certain securities law requirements. Consultation with the CSA Regulatory Sandbox, an initiative of the CSA that supports fintech businesses, is another option for businesses looking to engage in cryptocurrencies.

Conclusion

The Notice is a useful supplement to SN 46-307 as it provides additional examples of where certain tokens or coins may be considered securities. When considering whether offering token meets the criteria of an investment contract, the CSA stresses the importance of a purposive interpretation that includes considering the objective of investor protection. Further, the CSA emphasizes that even if the proposed function of a token is utility, it may still meet the criteria for an investment contract if an expectation of profit, or other criteria are established. It is evident that the application of securities laws to cryptocurrencies will continue to advance and that businesses should protect themselves by consulting with qualified securities legal counsel and exploring more flexible approaches through the CSA Regulatory Sandbox.

About BLG

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
 
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