Canadian SEC: ICOs May Be Securities, Need to Follow Lawsbr>
The Canadian Securities Administrators (CSA) has published a staff notice addressing the rise of initial coin offerings (ICO).
Titled Cryptocurrency Offerings, the notice outlines how securities law requirements may apply to ICOs, initial token offerings (ITO), cryptocurrency investment funds, and the cryptocurrency exchanges trading these products.
The notice follows similar guidelines issued earlier by the US Securities and Exchange Commission on ICOs. Both aim to rein in the proliferation of such offerings and establish some regulatory framework for their issue.
The CSA said that, while token offerings offer businesses new opportunities to raise capital, they also raise concerns over investor protection, volatility, transparency, valuation, custody, and liquidity, and regulation. In addition, unethical practices, scams, and a lack of understanding, may be harmful to investors.
The notice stated that, at least in some cases, this new fundraising phenomenon should be categorized as securities. This implies that certain ICOs/ITOs would now need to follow Canadian securities laws, which requires assessing the economic realities of the offering to protect participating investors.
The regulator suggests that FinTech firms get in touch with the CSA’s FinTech sandbox, which supports businesses navigating regulations. It also suggests contacting local securities regulatory authorities to learn how to comply with securities laws.
To ensure that investors are sold investments that include all the proper disclosures, those who use ICOs to sell tokens registered as securities must sell their product to “accredited investors” to get an exemption from prospectus requirements. Otherwise, tokens sales to crypto-investors who do not qualify as accredited investors will need to use an offering memorandum (OM) prospectus.
The notice also provided insight on the necessity for businesses to provide documentation in addition to whitepapers. The CSA said that while whitepapers may provide disclosure to investors, it may not be enough for this purpose since “they are often not structured in the same way as prospectuses or OMs.”
The CSA also stated that it has reviewed various token offerings, and concluded that many of those tokens were securities because they were investment contracts. It said, “In arriving at this conclusion, we have considered the relevant case law, which requires an assessment of the economic realities of a transaction and a purposive interpretation with the objective of investor protection in mind.”