Canadian Securities Administrators Issue Guidance on Cryptocurrency Offerings
Updated: Jan 24, 2020
Canadian Securities Administrators (the “CSA”) have issued a staff notice providing some guidance as to interface between Canadian securities laws and trends in cryptocurrency (also be referred to as virtual or digital currency, among other terms); cryptocurrency offerings (such as initial coin offerings (“ICO”) or initial token offerings (“ITO” ) and also be referred to as token generation events (“TGE”), among other terms) and sales of securities of cryptocurrency investment funds.
Many cryptocurrency offerings may, and likely will, involve sales of securities. Securities laws in Canada will apply if the person or company selling securities are conducting business from within Canada or if there are Canadian investors. Securities may only be sold after a receipt has been received from a securities regulatory authority for a comprehensive disclosure document called a “prospectus”, or pursuant to a private placement in reliance on a prospectus exemption. Businesses and individuals in the business of trading in or advising on securities must be properly registered or rely on an exemption from registration. A platform that facilitates trades in coins/tokens that are securities may be a marketplace and need to comply with marketplace requirements or obtain an exemption from such requirements. Finally, funds set up to invest in bitcoin and/or other cryptocurrencies may be an “investment fund” as defined under securities laws and therefore be subject to a number of prescribed requirements including limitations with respect to retail investors, custody of portfolio assets and consideration of the appropriate registration categories in respect of the investment fund, including dealer, adviser and/or investment fund manager. The CSA also cautions that many cryptocurrency products may also be derivatives and subject to the derivatives laws adopted by the Canadian securities regulatory authorities, including trade reporting rules.
The definition of “securities” under Canadian law is very broad and includes, specifically, an “investment contract”. In determining whether or not an investment contract exists, businesses must apply a likewise broadly defined four-prong test and ask does the ICO/ITO involve: (1) an investment of money; (2) in a common enterprise; (3) with the expectation of profit; (4) to come significantly from the efforts of others.
Both “trading” and “advising” in securities are generally interpreted broadly. The CSA noted that with many of the early forms of ICOs/ITOs reviewed, they had determined that the following factors, among others, were important considerations for whether a person or company is trading in securities for a business purpose: (1) soliciting a broad base of investors, including retail investors; (2) using the internet, including public websites and discussion boards, to reach a large number of potential investors; (4) attending public events, including conferences and meetups, to actively advertise the sale of the coins/tokens; and (5) raising a significant amount of capital from a large number of investors.
An “investment fund” is likewise very broadly defined and includes both a mutual fund and a “non-redeemable investment fund”, itself defined broadly as an issuer: (1) whose primary purpose is to invest money provided by its security holders; and (2) that does not invest for the purpose of exercising or seeking to exercise control of an issuer or for the purpose of being actively involved in the management of any issuer in which it invests).
Fintech and other similar businesses should consider if and how prospectus, registration and/or marketplace requirements apply to their cryptocurrency offerings or other activities.
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