The Canadian Securities Administrators (CSA) have posted a notice regarding companies that are using Initial Coin Offerings (ICOs) to raise capital online. The CSA published a Staff Notice, 46-307 Cryptocurrency Offerings, noting that issuers may need to comply with existing securities law. Canada is the third country to publicly caution issuers and investors on ICOs. The US Securities and Exchange Commission and Monetary Authority of Singapore have both posted similar notes. The CSA is the council of securities regulators of Canada’s provinces and territories that coordinates and harmonizes regulation for the Canadian capital markets.
Attorney Joshua Ashley Klayman, the chair of Morrison & Foerster’s Blockchain + Smart Contracts Group, commented on the CSA Notice;
“Aspects of the guidance from the Canadian Securities Administrators appear consistent with what we have seen from the US Securities and Exchange Commission and the Monetary Authority of Singapore,” said Klayman.
Klayman described the four-pronged test for the existence of an investment contract, given in CSA’s release, is one example of that consistency. The test asks whether the ICO or ITO [Initial Token Offer] involves: (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.
The notice (embedded below) outlines the factors CSA staff consider in assessing whether prospectus, registration and marketplace requirements apply. It also outlines how the CSA Regulatory Sandbox can help fintech businesses contemplating such offerings and summarizes key issues that businesses should be prepared to discuss with CSA staff.
“The technology behind cryptocurrency offerings has the potential to generate new capital raising opportunities for businesses and we welcome this type of innovation,” said Louis Morisset, CSA Chair and President and CEO of the Autorité des marchés financiers. “Given the growing activity in this novel area, we are publishing guidance to help fintech businesses understand what obligations may apply under securities laws.”
Any business that is planning to raise capital through an ICO or ITO, or that is seeking to establish a cryptocurrency investment fund, should consider whether it involves a security. The CSA said that businesses should also contact their local securities regulatory authority to discuss possible approaches to complying with securities laws.