Last week, the Canadian Securities Administrators (“CSA”) and the Investment Industry Regulatory Organization of Canada (“IIROC”) jointly published their third staff notice this year targeting crypto-trading platforms (“CTPs”) that are registered or have applied for registration as securities dealers. This staff notice 21-330 (the “Notice 21-330”) provides guidance on the types of advertising activities, social media content, and marketing strategies by CTPs that may breach securities requirement.
Notice 21-330 reiterates the regulators’ position that CTPs will be subject to securities legislation if 1) crypto assets that are securities and/or derivatives are traded on the platform; or 2) the CTPs manage the contract for the purchase, sale or delivery of a crypto asset, even if the assets traded on the platform are not securities. It also remind CTPs and prospective CTPs registrant that CSA staff may review advertising and marketing as part of the registration process and through compliance reviews, and that enforcement actions may be undertaken should non-compliance with securities legislation requirements be identified.
Notice 21-330 urges CTPs to make sure their advertising practices are in compliance with securities legislation and IIROC rules, as well as the obligation to treat their clients fairly, honestly and in good faith. In particular, Notice 21-330 warns CTPs against certain activities determined to be problematic by CSA and IIROC, some of which being described in greater detail below. Additional examples of statements that could be considered false or misleading are described in an 5 pages appendix to Notice 21-330, and why such statements are so characterized.
Misleading statements with insufficient support
CTPs are advised not to make misleading or false representations in the marketing material regarding their status under the securities regulation, for example, by suggesting they are registered but, in fact, not. In particular, CTPs who are registered as Money Service Businesses (“MSBs”), are advised not to make statements to the effect that they are in compliance with “all regulatory requirements” as those CTPs could be subject to securities regulation. Regulators found such a statement to be misleading because it implies a level of consumer protection and regulatory safeguards that the MSB registration itself does not provide.
Another example of a misleading statement identified by the regulators is “the [platform] is the safest and most trusted by leading rating agencies.” CSA and IIROC believe that such a statement can create an impression in the investor’s mind that there are regulated rating agencies that have particular expertise. The same principle applies to statements made by third-party sources, and CTPs are advised to conduct due diligence on such sources and validate the statements before disseminating them to the public.
In addition, CTPs are advised not to hold themselves out as an “exchange” and/or “marketplace” merely because it facilitates trades in securities or derivatives unless they are properly registered in those categories, as those terms have specific meanings under securities legislation.
Overly promotional statements
When engaging individuals to provide a promotional statement regarding the product or services, CTPs are advised to be aware that promotional statements can be considered a form of recommendation or advice. For example, a statement about one always using a particular CTP because it is convenient or a statement like “BTC skyrockets! Don’t get left behind!” can both be considered as a form of recommendation.
In order to rely on the “newsletter exemption” provided under the securities legislation, CTPs need to fulfill two conditions: 1) the advice cannot be tailored to the needs of the person receiving the advice, and 2) the person providing the advice must disclose concurrently any “financial or other interest” the person (or certain related persons) has in the issuer.
Regulators warn CTP against using disclaimers as means to justify its overly promotional, potentially misleading statements. A disclaimer must be located proximate to and be reasonably related to the statements.
Lack of transparency in pricing and compensation
Under securities law, a registered marketplace is required to provide clear and complete disclosure relating to fees and other ways the marketplace is compensate. If a CTP markets itself as a platform that never charges commissions, but instead charges a markup, takes a spread on trades it facilities, or monetizes client order-flow, then the CTP is required to disclose the details of those forms of compensation.
In addition, CTPs are required to make reasonable efforts and have policies and procedures in place that outline the process designed to achieve the best execution or fair pricing for their customers.
Regulators are aware that some CTPs use contests, offer bonuses, and implement time-limited promotions to encourage investors to act quickly for fear of missing out on the investment or reward. CSA and IIROC consider these “gambling-style” schemes to be extremely concerning because they promote excessively risky trading and could trick investors into taking risks they would normally avoid.
We encourage all cryptocurrency industry participants to review Notice 21-330 and carefully consider how it might apply to their business, For more information or questions regarding the Notice 21-330, please do not hesitate to contact us or any member of our Investment Funds and Securities and M&A Team.
 Appendix A, Notice 21-330. Also see s. 8.25(2) [Advising generally] of NI 31-103. In Ontario, see s. 34(1) of OSA. In British Columbia, see also Proposed British Columbia Instrument 51-519 Promotional Activity Disclosure Requirements.