On July 24, 2019, the Ontario Securities Commission (the "OSC") approved a settlement agreement with CoinLaunch Corp. ("CoinLaunch"), a provider of various ICO-related services in the crypto industry. Following an investigation by the OSC, it was determined that CoinLaunch engaged in and held itself out as engaging in the business of trading in securities, without registration under Ontario's Securities Act (the "Act").
As a result of the investigation and resulting settlement, CoinLaunch was subjected to fines and repayments of approximately $50,000, and is prohibited from acquiring or trading in any securities or derivatives for five years. In addition, CoinLaunch's former CEO, Reuven Cohen, agreed not to act as a director or officer of any unregistered company which engages in the business of trading in securities.
This settlement suggests that the OSC is broadening its scope of enforcement in the crypto industry beyond crypto exchanges and ICO issuers to include consultants, dealers, and advisers who may have conducted registrable activities without first registering.
The CoinLaunch Settlement
Between March 1, 2018 and September 30, 2018, CoinLaunch's operations revolved around advertising "crypto-consulting", i.e. marketing and promotional services, to two cryptocurrency offerings: Buggyra Coin Zero ("BCZERO") and EcoRealEstate ("ECOREAL" and collectively, the "Issuers"). BCZERO's business involves an off-road truck racing team in the Czech Republic, while ECOREAL is developing a resort in Portugal.
CoinLaunch provided various services to both BCZERO and ECOREAL including, but not limited to:
- creating and preparing promotional materials for the Issuers;
- introducing the Issuers to potential investors via an online forum;
- providing advice to the Issuers regarding the structure of the offerings;
- creating and managing websites to promote the Issuers' offerings; and
- taking the offerings on roadshows to help solicit investors.
Section 1(1) of the Act defines a "security" to include "any investment contract"1 and while "investment contract" is not specifically defined within the Act, the Supreme Court of Canada in Pacific Coast Coin Exchange of Canada v. Ontario (Securities Commission) determined that an investment contract will be found where there is: (a) an investment of money; (b) with an intention of expectation of profit; (c) in a common enterprise, in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties; and (d) that the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.2
The OSC took the opinion, and CoinLaunch agreed in the settlement agreement, that the Issuers' tokens constituted investment contracts pursuant to the Act. As such, the services that CoinLaunch provided to the Issuers constituted acts in furtherance of trades and considering that those services were central to CoinLaunch's business, required CoinLaunch to register as a dealer with the OSC. While CoinLaunch eventually took mitigating actions upon investigation from the OSC including removing webpages from the internet, ceasing their business relationship with the Issuers, and deciding to cease their crypto-consulting business rather than initiating a registration process, the OSC still levied a punishment against CoinLaunch for having provided those services without being registered.
Pursuant to the settlement agreement, CoinLaunch was ordered to pay an administrative penalty of $30,000, disgorge $12,233.06 to the OSC, pay costs of $10,000, refrain from acquiring any securities for five years, and refrain from acquiring or trading in any securities or derivatives for five years. Furthermore, CoinLaunch's former CEO, Reuven Cohen, gave an undertaking to: (a) not become or act as a director or officer of any company which engages in or holds itself out as engaging in the business of trading in securities without applicable registration under Ontario securities law or an exemption from such requirement; and (b) ensure that all references to the private keys in respect of all BCZERO and ECOREAL tokens received by CoinLaunch as compensation are deleted and thereby rendered inaccessible such that those tokens may not be accessed or transferred in the future.
The OSC made it clear that its intention moving forward will be to investigate and sanction all non-registrants conducting registrable activities in the crypto-asset sector, stating:
"Notwithstanding the result in this settlement, firms that are found to have ignored the registration obligation in the future should be considered on notice and can reasonably expect to face more stringent consequences. Both specific and general deterrence will likely require stronger measures if such conduct arises in the future."
We believe this decision represents a broadening of the Canadian regulatory landscape regarding the crypto industry. Following a review of the relevant case law, it appears as though the CoinLaunch case represents the first time in Canada, and perhaps also the United States, that a securities regulator has levied penalties against consultants in the crypto-asset sector rather than issuers or exchanges.
In light of this, actors in the crypto-asset sector should cautiously approach a decision to forego the registration process given that the OSC: (a) levied penalties of over $50,000 against CoinLaunch, and (b) highlighted, in its settlement decision, the undertakings of the former CEO to refrain from future capital markets activities. With this decision, as well as their words of caution in the settlement agreement, the OSC has communicated their intention to increase the scope of their enforcement measures to include non-issuers like CoinLaunch.
If you are operating in the crypto-asset sector and have questions about registration matters, please feel free to contact Daniel Fuke at Fasken at 416-865-4436 or email@example.com.
1 Securities Act, RSO 1990, c S 5, s 1(1).
2 Pacific Coast Coin Exchange v Ontario (Securities Commission), 1977 CanLII 37 (SCC),  2 SCR 112 at 128.
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