CSA  | Aug 24, 2017

Introduction and purpose

Staff (we or staff) of the Canadian Securities Administrators (CSA) are aware of an increase in the number of cryptocurrency offerings, such as initial coin offerings (ICO), initial token offerings (ITO)2 and sales of securities of cryptocurrency investment funds.

Cryptocurrency offerings can provide new opportunities for businesses to raise capital and for investors to access a broader range of investments.  However, they can also raise investor protection concerns, due to issues around volatility, transparency, valuation, custody and liquidity, as well as the use of unregulated cryptocurrency exchanges3.  Also, investors may be harmed by unethical practices or illegal schemes, and may not understand the properties of the investment products that they are purchasing.

We note that these products may also be derivatives and subject to the derivatives laws adopted by the Canadian securities regulatory authorities, including trade reporting rules.

See:  OSC Highlights Potential Securities Law Requirements for Businesses Using Distributed Ledger Technologies

Businesses should consider if and how prospectus, registration and/or marketplace requirements apply to their cryptocurrency offerings.  Specifically and as described in more detail in this Staff Notice:

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; and
• 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.

This Staff Notice will:

• Respond to requests from fintech businesses for guidance on the applicability of securities laws to cryptocurrency offerings and what staff will consider in assessing if an ICO/ITO is a distribution of securities;
• Discuss what steps fintech businesses can take if they are raising capital through ICOs/ITOs, so that they comply with securities laws;
• Highlight issues that fintech businesses looking to establish cryptocurrency investment funds should be prepared to discuss with staff;
• Discuss how the use of cryptocurrency exchanges may impact staff’s review of ICOs/ITOs and cryptocurrency investment funds; and
• Explain how the CSA Regulatory Sandbox can help fintech businesses with cryptocurrency offerings comply with securities laws through a flexible process.

This Staff Notice focuses on ICOs/ITOs and cryptocurrency investment funds, and their intersection with cryptocurrency exchanges.  However, this guidance should also be considered in the context of other cryptocurrency or distributed ledger technology-based offerings that may trigger securities law requirements.

1 This Staff Notice is being published in all of the jurisdictions of Canada except Saskatchewan. The Financial and Consumer Affairs Authority of Saskatchewan will advise of its approach in this matter after the provincial by- election in Saskatchewan on September 7, 2017.

2 Cryptocurrency may also be referred to as virtual or digital currency, among other terms. ICOs and ITOs may also be referred to as token generation events (TGE), among other terms.

3 The term “exchange” used in this context is not intended to be the same as the term used in National Instrument

21-101 Marketplace Operation and securities legislation of the jurisdictions of Canada, but instead reflects what these entities are commonly referred to today.

4 Many authorities have recently cautioned that sales of digital assets may be subject to securities laws:

https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-initial-coin-offerings http://www.mas.gov.sg/News-and-Publications/Media-Releases/2017/Consumer-Advisory-on-Investment-Schemes- Involving-Digital-Tokens.aspx

Continue to the full 8 page staff notice --> here

The National Crowdfunding Association of Canada (NCFA Canada) is a cross-Canada non-profit actively engaged with both social and investment crowdfunding stakeholders across the country. NCFA Canada provides education, research, leadership, support, and networking opportunities to over 1600+ members and works closely with industry, government, academia, community and eco-system partners and affiliates to create a strong and vibrant crowdfunding industry in Canada. Learn more at ncfacanada.org.