On March 29, 2021, the Canadian Securities Administrators (“CSA”) and the Investment Industry Regulatory Organization of Canada (“IIROC”) jointly published Staff Notice 21-329 Guidance for Crypto-Asset Trading Platforms: Compliance with Regulatory Requirements (“Notice 21-329”). Notice 21-329 provides guidance on how securities legislation will be applied to crypto-asset
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…
On December 22, 2020, the U.S. Securities and Exchange Commission (“SEC”) filed an action against Ripple Labs Inc. (“Ripple”), Christian Larsen, the company’s co-founder, executive chairman of its board, and former CEO; and Bradley Garlinghouse, the company’s current CEO (together, the “Defendants”) for conducting an unregistered securities offering with a total value of US$1.38 billion.…
On July 24, 2019, the Ontario Securities Commission (the “OSC”) approved a settlement agreement with CoinLaunch Corp. (“CoinLaunch”), a provider of various ICO-related services in the crypto industry. Following an investigation by the OSC, it was determined that CoinLaunch engaged in and held itself out as engaging in the business of…
On June 4, 2019, the US Securities and Exchange Commission (SEC) sued Kik Interactive Inc. (Kik), a privately-held Canadian corporation based in Waterloo, Ontario, for conducting an unregistered securities offering of its digital token “Kin” in violation of section 5 of the Securities Act of 1933. The SEC is seeking a permanent injunction, disgorgement of ill-gotten gains, and civil penalties against Kik.
In August 2017, we considered the guidance offered by the Canadian Securities Administrators (CSA) regarding the application of securities laws to the blockchain industry and initial coin offerings (ICOs), primarily as set out in CSA Staff Notice 46-307 Cryptocurrency Offerings. In that post, we noted that the CSA have provided little guidance regarding when they would consider cryptocurrencies to be securities, and thus subject to Canadian securities rules.
Continue Reading Regulatory Net Tightening on the “Wild West” of the Blockchain and Cryptocurrency Industry
As ICO regulatory landscape gradually takes shape, Kik Interactive excludes Canadians from Kin token sale
On September 7, 2017, Kik Interactive Inc. (Kik), a Waterloo-based digital messaging company, announced that it would not permit Canadian investors to purchase its “Kin” crypto-tokens in its currently ongoing public sales process. Kik had previously announced plans to sell up to U.S.$125 million of Kin tokens, including to Canadians. Kin tokens are envisioned as a general purpose cryptocurrency for use in services such as chat, social media, and payments, all within the Kin ecosystem.
The announcement was made in a blog post by Kik Chief Executive Officer Ted Livingston, who cited “weak guidance” from the Ontario Securities Commission (OSC) regarding whether Kin tokens are securities as the reason for banning Canadians. The OSC later clarified to the National Post that they had reviewed the Kin token and concluded that it is a security, but that they were willing to grant Kik exemptive relief from certain securities law requirements provided additional protections were granted to retail investors.
While Kik’s submissions to the OSC and the details of the OSC’s conclusion are not public, the OSC’s conclusion nevertheless provides some regulatory guidance at a time when industry participants are eager to determine precisely when tokens will be subject to securities laws. Another example of such guidance was provided in the case of Impak’s MPK tokens, which are designed to allow holders to purchase goods and services from like-minded merchants operating within the “impact” economy. Similar to Kin, the MPK tokens are considered a security, in this case by both the Autorité des Marchés Financiers in Quebec (AMF) and the OSC.
On August 24, 2017, the staff of the Canadian Securities Administrators other than Saskatchewan (CSA) published CSA Staff Notice 46-307 Cryptocurrency Offerings (the Staff Notice) in response to increased activity within the distributed ledger technology or “blockchain” industry. The Staff Notice provides guidance regarding the application of Canadian securities laws to businesses operating in that industry, in particular those undertaking initial “coin” or “token” offerings (ICOs), exchanges on which those coins, tokens and cryptocurrencies are traded and investment funds that invest in such assets.
The Staff Notice provides that in the CSA’s view many coins, tokens and cryptocurrencies fall within the definition of “securities” under Canadian securities laws. An offering of such tokens would therefore require a prospectus or exemption from prospectus requirements and businesses supporting and operating ancillary to such tokens could be subject to registration requirements. The Staff Notice also provides that such products may also be derivatives and subject to the derivatives laws adopted by the Canadian securities regulatory authorities.
The Staff Notice confirms speculation among industry participants and advisors that Canadian regulators would take this approach, which is similar to the positions articulated by the United States Securities & Exchange Commission and securities regulators in Singapore.
With respect to ICOs, the Staff Notice provides that, from the CSA’s perspective, many of the ICOs completed to date involved the sale of securities and that securities laws in Canada will apply if the person or company selling the securities is conducting business from within Canada or there are Canadian investors in the tokens.
The CSA are aware of businesses marketing their tokens as software products and taking the position that the tokens are not subject to securities laws. It appears to be the CSA’s view, however, that in many cases, when the totality of the offering or arrangement is considered, the tokens should properly be considered securities. In assessing whether or not securities laws apply, the Staff Notice states that the CSA will consider substance over form and apply a purposive interpretation to the law with the objective of investor protection in mind.
On July 25, 2017, the United States Securities and Exchange Commission (SEC) issued a report of investigation (Report) concluding that the digital currency “tokens” sold by DAO (DAO Tokens) in a 2016 initial coin offering (ICO) are securities for purposes of federal United States securities laws. This conclusion could have far-reaching implications for businesses that have completed or are contemplating an ICO, businesses dealing with tokens or cryptocurrencies, such as cryptocurrency exchanges, as well as the still-developing legal landscape relating to ICOs and distributed ledger or “blockchain” technology.
Beginning in 2013, many entities that use blockchain technology as their operational foundation have raised funds through ICOs. While precise data is not available, various sources estimate that since the beginning of 2016, between 84 and 139 ICOs have been completed, raising gross proceeds of between U.S.$281 million and U.S.$1.35 billion.(1) In some cases, ICOs have sold out in a matter of seconds, such as the Basic Attention Token ICO in May 2017 which raised U.S.$35 million in less than 30 seconds.(2)
Pursuant to an ICO, an entity offers digital currency tokens to purchasers, typically in exchange for digital consideration such as Bitcoin or Ether. The rights attaching to these tokens vary greatly, with some resembling “kick-starter” style crowd-funding in that token holders have pre-paid for goods or services offered by the entity and others resembling common shares in a company in that token holders have certain voting rights and certain rights to dividend-like payments from the entity.
Commencing March 8, 2017, new rules relating to the risk classification of conventional mutual funds and exchange-traded funds (collectively, mutual funds) will come into force. The new rules will primarily involve amendments to National Instrument 81-102 Investment Funds (NI 81-102), but will also involve consequential amendments to National Instrument 81-101 Mutual Fund Prospectus Disclosure (NI 81-101), certain forms under NI 81-101, and its companion policy (the Amendments).
The Canadian Securities Administrators (CSA) initially introduced the idea of a standardized risk classification methodology applying to all mutual funds in December 2013 and later refined it in draft amendments published in December 2015. The CSA considered the comments it received on both publications in developing this final version of the Amendments, which is largely similar to the 2015 version.
Pursuant to the Amendments, mutual fund managers will be required to use a standardized methodology, based on standard deviation, to classify the investment risks of their mutual funds. Currently, mutual fund managers are permitted to adopt a risk classification methodology of their own choosing, provided it is described in the mutual fund’s prospectus and fund facts. The CSA believe that a standardized methodology will allow investors to better compare the investment risk levels of different mutual funds.