Canadian Securities Regulators Consider Most ICOs and Tokens as Securities, Subject to Prospectus


CSA staff (“CSA”) on June 11, 2018 issued CSA Staff Notice 46-308, Securities Law Implications for Offerings of Tokens (’46-308”). 46-308 was intended to respond to inquiries on the applicability of securities laws to offerings of coins or tokens, including ones that are commonly referred to as “utility tokens”.

In 46-308, the CSA restates its earlier position that many cryptocurrency offerings, such as initial coin offerings (ICO) and initial token offerings (ITO), involve sales of securities, and are fully subject to securities laws, including receipt and clearance by the commissions of a prospectus. This is because the offering and/or the coins or tokens issued under the offering constitute investment contracts or are otherwise securities, when the totality of the offering or arrangement is considered.

In general, securities laws will not apply if a token is being sold which is a utility token and can be used only for a specific purpose, such as purchase of specific software, and the item being purchased exists as a finished product. In 46-308, the CSA provide many examples of ICOs or ITOs where the issuer thought that securities laws do not apply, but the examples show why, in the CSA’s view, securities laws do apply. Among other indicators, where purchasers purchase tokens with an expectation to resell them later at a profit, securities laws do apply.

The CSA states that they “are conducting active surveillance of coin and token offerings activity to identify past, ongoing and potential future violations of securities laws or conduct in the capital markets that is contrary to the public interest. CSA members have taken and intend to continue taking regulatory and/or enforcement action against businesses that do not comply with securities laws.”

“As trends in the cryptocurrency industry are evolving quickly, we encourage businesses seeking flexible approaches to compliance with securities laws to contact their local securities regulatory authority to discuss their project …. When contacting their local securities regulatory authority, businesses should be ready to provide a draft whitepaper, a business plan or a detailed description of their proposed offering. We may also ask for copies of promotional materials in connection with the offering, and a description of the promotional activities and marketing efforts in respect of the offering, as well as information on the corporate structure and principals involved.”

If you are considering an ICO or ITO, contact any member of Clark Wilson LLP’s Capital Markets, Securities and M&A Group.