On March 11, 2021, the Canadian Securities Administrators (“CSA”) published Staff Notice 51-363 – Observations on Disclosure by Crypto Assets Reporting (“Notice 51-363”), the first update from CSA regarding entities dealing in crypto assets in more than a year. Based on the disclosure of reporting issuers acting in the crypto asset space, Notice 51-363 provides staff guidance on expectations for disclosure in this industry.
Crypto asset reporting issuers have the same obligations as other public companies in disclosing material information and changes that affecting their businesses, as well as the financial impacts of such risks. Notice 51-363 reiterates the importance of fulfilling these obligations, and at the same time, recognizes the emerging nature of the crypto asset industry and novel issues reporting issuers may face.
Notice 51-363 can assist current and future reporting issuers because it provides detailed guidance on disclosure expectations in the context of crypto assets industry and highlights perceived insufficiencies in the disclosure of current reporting issuers.
Summary of guidance
With respect to custody matters, Notice 51-363 sets out Staff’s position that a reporting issuer’s controls and safeguard measures are material to investor protection and will be a focus of the regulators’ review of their public filings. For reporting issuers using third-party custodian services, Staff believes that material information includes, but is not limited to: i) identity, status and location of the service provider; ii) quantity or percentage of assets so held; iii) insurance and limitation on the custodian’s liability; and iv) treatment of assets held in the event of custodian’s bankruptcy. Notice 51-363 also points out that custodian agreements can be considered a material contract, requiring their filing on SEDAR. If the repotting issuer self-custodies, Notice 51-363 states that the reporting issuer should provide reasons for not engaging a third party.
Use of Third-Party Crypto Asset Trading Platforms
Notice 51-363 also notes that if a reporting issuer relies on third party trading platforms to hold, manage and safeguard its crypto assets, it is subject to the risks related to the solvency, integrity and proficiency of the operators of the platform, which warrants, at minimum, the same amount of information as required if the platform is a third-party custodian.
Description of Business and Risk Factors
Notice 51-363 also discusses the fundamental requirement to provide disclosure on business operations and expertise of personnel, as well as disclose risk factors tailored to the issuer and business. Notice 51-363 provides examples of potential risks that should be disclosed, such as the availability and cost of electricity, potential declines on the price of crypto assets, and risks associated with crypto assets held at third-party custodians or trading platforms.
CSA Staff believes that reporting issuers have generally failed in complying with their obligations in reporting material changes or filing the material change report within the required 10-day period. Notice 51-363 provides a list of potential material changes for reporting issuers in the crypto asset space, including obtaining or changing custodian services; loss or theft of crypto assets; purchase or sale of crypto mining equipment; and entering into arrangements in relation to crypto mining activities.
Investing in Crypto Assets
According to Notice 51-363, if a reporting issuer’s main operation is investing in crypto assets, it might be subject to requirements and considerations under the investment fund regime, even though it does not technically meet the definition of an investment fund. If such a reporting issuer plans to file a prospectus, it will be required to address certain investor protection considerations, such as including investment concentration restrictions; continuous disclosure regarding investee companies; and a requirement to use a qualified custodian.
Notice 51-363 also discusses certain novel accounting issues crypto assets pose, including with respect to the holding of crypto assets. Notice 51-363 provides that reporting issuers should apply International Accounting Standards (“IAS”) 2 inventories standard on the sale of cryptocurrencies and apply IAS 38 Intangible Assets to holdings of cryptocurrencies.
Staff notes that issuers in the crypto mining industry face unique complexities associated with the arrangement of mining pools, mining transaction fees, mining equipment and infrastructures. Notice 51-363 recommends that reporting issuers include robust disclosure of accounting policies and carefully consider whether an indicator of impairment exist with regards to mining equipment.
Notice 51-363 further points out that non-monetary transactions settled in cryptocurrencies present risk of market manipulation given the volatility of cryptocurrencies prices, and reporting issuers are expected to have measures in place to control those risks.
Notice 51-363 provides a useful guide to reporting issuers in the crypto assets industry regarding CSA’s disclosure expectations, but also suggests that CSA considers certain disclosures made by current reporting issuers as being insufficient. Industry participants that are reporting issuers, or that are considering going public through a reverse take-over or initial public offering should carefully consider the guidance provided in Notice 51-363 and adjust or plan their disclosure accordingly.
Fasken will continue to monitor further guidance or policy changes by the CSA and provincial securities commissions. We recommend stakeholders in the crypto industry to consult advisors and regulators for guidance when filing for disclosure documents.
 CSA Staff Notice 21-327 was published on January 16, 2020, which provided guidance on the application of securities law to crypto asset trading platforms. See detail: https://www.osc.ca/en/securities-law/instruments-rules-policies/2/21-327/csa-staff-notice-21-327-guidance-application