On August 24, 2017, the Canadian Securities Administrators (“CSA”) issued CSA Staff Notice 46-307 (“Staff Notice”) regarding its views with respect to cryptocurrency offerings. The Staff Notice indicated that tokens issued in the context of initial coin offerings could be considered “in many cases” as securities and that as such, securities law could apply to any coin offerings in Canada. Several commentators viewed the Staff Notice as a general warning to cryptocurrency enthusiasts, narrowing the path for cryptocurrency offerings and making it clear that the CSA will expect each and every ICO to receive careful securities law scrutiny from regulators. Certain important cryptocurrency commentators1 criticized the Staff Notice for furthering impediments to capital raising initiatives and lacking any clear legal indications to the cryptocurrency community. On the other hand, others saw the Staff Notice as a welcomed initiative to strike an adequate balance between the objective of relaxing burdensome and costly requirements to facilitate capital formation on the one hand, and protecting investors on the other. We tend to agree with the latter and further argue that the Staff Notice provides added legal certainty to a complex and innovative environment and might help foster an ICO-friendly environment in Canada. Stringent, clear and enforced securities regulation enhances capital formation – this is no different for coin offerings.
On October 17, 2017, the Ontario Securities Commission (“OSC”) rendered a landmark decision in the context of the initial coin offering (the “Offering”) of Token Funder Inc. (“Token”)2. Although not the first ICO in Canada3 to receive the blessing of a regulator, it is Ontario’s first. Ontario being the most important capital market in Canada, the OSC’s decision should provide further guidance and predictability within Canada, hence its importance. In its decision, the OSC granted Token an (i) exemptive relief from the dealer registration requirement under National Instrument 31-101 – Registration Requirements, Exemptions and Ongoing Registrant Obligations; and (ii) approval of its application to launch an ICO by way of a private placement under the offering memorandum prospectus exemption provided under section 2.9 of National Instrument 45-106 – Prospectus Exemptions (“NI 45-106”). Such reliefs and authorizations were granted subject to several conditions as set out in the decision, including the completion of know-your-client and suitability, restrictions on listing and trading on cryptocurrency exchanges and quarterly reporting requirements as detailed below:
- Operation: initial token offering of 1,000,000,000 digital tokens through a smart contract on the Ethereum Blockchain (each a “FNDR Token”) by way of a private placement conducted under the offering memorandum prospectus exemption provided under section 2.9 of NI 45-106.
- Distribution of the 1,000,000,000 FNDR Tokens: (i) up to 200,000,000 FNDR Tokens to investors for total gross proceeds of up to approximately CAD $10,000,000; (ii) 100,000,000 FNDR Tokens held back as payment currency for advisors in due course, including engineers, advisory board members and any other service provider; and (iii) up to 700,000,000 FNDR Tokens held back for future financings and issued at such times as Token determines appropriate to fund its on-going operations.
- Maximum investment: CAD $2,500 per investor unless such investor provides additional support to evidence that it is an eligible investor or an accredited investor.
- Value of Ether: determined at the time that an investor completes the on-boarding process described in paragraph 7 below and is approved for participation in the Offering by Token.
- Minimum proceeds: proceeds from the Offering will be returned to investors in the event that a minimum of CAD $500,000 is not raised in the offering (held in an escrow account maintained by Token’s legal counsel or an independent escrow agent) and returned to investors if a minimum of CAD $500,000 (or the Ether equivalent thereof) is not raised in the Offering.
- Distributions to FNDR Tokens Holders: FNDR Token holders will receive their share of the distributions from Token, if any, arising from the operation of the “STAMP” platform as set out in the Token’s offering memorandum, at the board’s discretion.
- Know Your Client (KYC) Obligations: (i) comprehensive on-boarding process, collection of information such as investment needs and objectives of investors, financial circumstances and risk tolerance; (ii) a survey to ensure the investor has a detailed understanding of cryptocurrency and digital token offerings; and (iii) a detailed disclosure of personal information and corresponding electronic verification.
- Disclosure obligations: FNDR Tokens holder will receive (i) updates from management of the filer regarding the milestones for development of its “STAMP” platform and any other material events concerning the business of the filer; and (ii) annual audited financial statements. Token must provide the OSC, in a format reasonably acceptable to staff, (i) details of investor complaints received by Token within 10 days of any such complaint, and (ii) quarterly reporting (within 10 days of the end of each quarter) with sufficient information on the following: average subscriber purchase amounts, indicating Canadian dollar amounts and Ether amounts; regional subscriber purchase totals, indicating Canadian and global subscriber participation; and such other information as the Director may reasonably request.
- Listing: the FNDR Tokens issued in the Offering will not be listed and traded on any exchange, cryptocurrency exchange or organized market unless such listing and trading is done in accordance with applicable securities laws and approved in advance by the OSC.
- Policies: filer will establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to manage the risks associated with its business in accordance with prudent business practices, including with respect to the Ethereum Blockchain, cybersecurity and conflicts of interest between the Filer and its investors.
The recent PlexCoin debacle4 exemplifies that Canadian regulators will not take coin offerings lightly and enforce securities regulation when required to adequately protect investors’ interests. The Staff Notice and the OSC decision in Token however indicate a clear willingness to engage with innovative businesses looking to properly raise capital through initial coin offerings. Although the Token decision may not be considered as a legal precedent for future ICOs, it could pave the way to several other coin offerings backed by regulators in Canada. More importantly it could incentivize the CSA to propose and adopt innovative regulations with respect to ICOs and help Canada’s positioning as a leading, sophisticated and friendly jurisdiction for cryptocurrency.
A business looking to raise capital through coin offerings targeting Canadian investors should obtain adequate legal counselling and proactively engage a dialogue with their regulator. The authors of this article will be pleased to answer your questions and can be reached at their respective details below.
Sean Griffin is a partner in Langlois’ litigation group. His practice focuses on complex litigation, regulatory and internal investigations involving corporate and securities matters.
Félix Bernard is a corporate and securities lawyer at Langlois Lawyers LLP, practicing in a wide-range of securities regulation matters including private placements and securities offerings for listed and private issuers. Felix holds a masters degree in securities regulation from the London School of Economics and Political Science.
Simon Chénard is a corporate, commercial and technology lawyer at Langlois Lawyers LLP. His practice embraces a broad spectrum of commercial operations such as launching businesses, drafting and negotiating a variety of contracts, the purchase and sale of businesses, corporate financing, corporate consolidations and reorganizations. Simon is one of the catalysts of the L-inc. Project, Langlois’ program for start-ups and emerging growth companies.
3 The Autorité des Marchés Financiers (AMF) provided regulatory relief to Impak Finance Inc.’s initial coin offering in a decision rendered on August 16, 2017.