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 trading in securities, without registration under Ontario’s Securities Act (the “Act”).

As a result of the investigation and resulting settlement, CoinLaunch was subjected to fines and repayments of approximately $50,000, and is prohibited from acquiring or trading in any securities or derivatives for five years. In addition, CoinLaunch’s former CEO, Reuven Cohen, agreed not to act as a director or officer of any unregistered company which engages in the business of trading in securities.

This settlement suggests that the OSC is broadening its scope of enforcement in the crypto industry beyond crypto exchanges and ICO issuers to include consultants, dealers, and advisers who may have conducted registrable activities without first registering.

The CoinLaunch Settlement

Between March 1, 2018 and September 30, 2018, CoinLaunch’s operations revolved around advertising “crypto-consulting”, i.e. marketing and promotional services, to two cryptocurrency offerings: Buggyra Coin Zero (“BCZERO”) and EcoRealEstate (“ECOREAL” and collectively, the “Issuers”). BCZERO’s business involves an off-road truck racing team in the Czech Republic, while ECOREAL is developing a resort in Portugal.

CoinLaunch provided various services to both BCZERO and ECOREAL including, but not limited to:

  • creating and preparing promotional materials for the Issuers;
  • introducing the Issuers to potential investors via an online forum;
  • providing advice to the Issuers regarding the structure of the offerings;
  • creating and managing websites to promote the Issuers’ offerings; and
  • taking the offerings on roadshows to help solicit investors.

Section 1(1) of the Act defines a “security” to include “any investment contract”[1] and while “investment contract” is not specifically defined within the Act, the Supreme Court of Canada in Pacific Coast Coin Exchange of Canada v. Ontario (Securities Commission) determined that an investment contract will be found where there is: (a) an investment of money; (b) with an intention of expectation of profit; (c) in a common enterprise, in which the fortunes of the investor are interwoven with and dependent upon the efforts and success of those seeking the investment or of third parties; and (d) that the efforts made by those other than the investor are the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.[2]

The OSC took the opinion, and CoinLaunch agreed in the settlement agreement, that the Issuers’ tokens constituted investment contracts pursuant to the Act. As such, the services that CoinLaunch provided to the Issuers constituted acts in furtherance of trades and considering that those services were central to CoinLaunch’s business, required CoinLaunch to register as a dealer with the OSC. While CoinLaunch eventually took mitigating actions upon investigation from the OSC including removing webpages from the internet, ceasing their business relationship with the Issuers, and deciding to cease their crypto-consulting business rather than initiating a registration process, the OSC still levied a punishment against CoinLaunch for having provided those services without being registered.

Pursuant to the settlement agreement, CoinLaunch was ordered to pay an administrative penalty of $30,000, disgorge $12,233.06 to the OSC, pay costs of $10,000, refrain from acquiring any securities for five years, and refrain from acquiring or trading in any securities or derivatives for  five years. Furthermore, CoinLaunch’s former CEO, Reuven Cohen, gave an undertaking to: (a) not become or act as a director or officer of any company which engages in or holds itself out as engaging in the business of trading in securities without applicable registration under Ontario securities law or an exemption from such requirement; and (b) ensure that all references to the private keys in respect of all BCZERO and ECOREAL tokens received by CoinLaunch as compensation are deleted and thereby rendered inaccessible such that those tokens may not be accessed or transferred in the future.

Analysis

The OSC made it clear that its intention moving forward will be to investigate and sanction all non-registrants conducting registrable activities in the crypto-asset sector, stating:

“Notwithstanding the result in this settlement, firms that are found to have ignored the registration obligation in the future should be considered on notice and can reasonably expect to face more stringent consequences. Both specific and general deterrence will likely require stronger measures if such conduct arises in the future.”

We believe this decision represents a broadening of the Canadian regulatory landscape regarding the crypto industry. Following a review of the relevant case law, it appears as though the CoinLaunch case represents the first time in Canada, and perhaps also the United States, that a securities regulator has levied penalties against consultants in the crypto-asset sector rather than issuers or exchanges.

In light of this, actors in the crypto-asset sector should cautiously approach a decision to forego the registration process given that the OSC: (a) levied penalties of over $50,000 against CoinLaunch, and (b) highlighted, in its settlement decision, the undertakings of the former CEO to refrain from future capital markets activities. With this decision, as well as their words of caution in the settlement agreement, the OSC has communicated their intention to increase the scope of their enforcement measures to include non-issuers like CoinLaunch.

If you are operating in the crypto-asset sector and have questions about registration matters, please feel free to contact Daniel Fuke at Fasken at 416-865-4436 or dfuke@fasken.com.

[1] Securities Act, RSO 1990, c S 5, s 1(1).

[2] Pacific Coast Coin Exchange v Ontario (Securities Commission), 1977 CanLII 37 (SCC), [1978] 2 SCR 112 at 128.

In recent years, competition/antitrust enforcers around the world, including Canada, have taken a marked interest in private equity deals.  As part of a broader global trend of tougher merger enforcement, private equity firms that have taken ownership positions (controlling or minority) in portfolio companies that are competitors have been subject to heightened scrutiny.  The litigation and subsequent settlement in involving Canada’s Competition Bureau and Thoma Bravo is the most recent example.

Continue Reading Private Equity in the Cross-Hairs of the Competition Regulator: Lessons Learned from Thoma Bravo

Introduction

In a number of recent cases, Canadian courts have demonstrated a willingness to vest mining claims free of royalty rights notwithstanding that those rights might constitute interests in land. One such case before the courts in Ontario is Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc.

Continue Reading Dianor Resolved – Jurisdiction to Vest Off Interests in Land in Receivership Upheld, but GORs Hard to Impair

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.

Continue Reading Alive and Kik-ing: Kik Interactive Faces SEC Action but Vows to Fight Back

Since it costs a lot to win, and even more to lose,

You and me bound to spend some time wondering what to choose.

Deal – The Grateful Dead

IIROC recently published guidance regarding managing conflicts of interest arising from soliciting dealer arrangements. The guidance elaborates on existing conflict of interest rules in the context of takeover bids, plans of arrangement, proxy contests and other securities transactions involving various types of solicitation fees.

Continue Reading IIROC Provides Guidance on Soliciting Dealer Arrangements

On June 5, 2019, the Ontario Securities Commission (the OSC) sent out a notice by means of a broadcast e-mail (the Notice) with respect to certain amendments regarding the suppression of terrorism or Canadian sanctions (STCS) applicable to all registered firms, exempt dealers and exempt advisers (each a Firm).

Continue Reading OSC Update re: Suppression of Terrorism Notice

As of June 13, 2019, the Canada Business Corporations Act (the “CBCA”) requires that each federal private corporation (a “Corporation”) implements and maintains a register (the “Register”) listing all individuals with significant control over the Corporation (the “Individuals with Significant Control”).  The register must be kept at the corporation’s registered office or another place in Canada designated by its directors.

While each Corporation has until June 13, 2019, to comply with this new Register requirement, we recommend that you begin, as soon as possible, to prepare the required Register and to develop the internal procedures necessary to ensure compliance with this requirement on an ongoing basis.  To assist you in this task, we enclose a Register template that can be used for this purpose.

The Register must accurately list the Individuals with Significant Control which are:

  • Each individual who has the ability to control the Corporation through indirect or direct influence (“control in fact” of the Corporation); and
  • Each individual who is the beneficial or registered owner of, or has direct or indirect control or direction over, 25% or more of the outstanding shares of the Corporation, measured by fair market value, and
  • Each individual who is the beneficial or registered owner of, or has direct or indirect control or direction over, a number of shares carrying at least 25% of the outstanding voting rights of the Corporation.

This covers any individual who (i) is a registered shareholder; (ii) is a beneficial owner; (iii) has direct or indirect control or direction over the shares of the Corporation or (iv) has joint ownership or control over the shares of the Corporation.

The law is in some cases unclear as to when a particular shareholder must be included in the Register, but this description is a starting point for understanding what is required.

Additionally, the Register must contain the following information for each Individual with Significant Control:

  • Name, birthdate and latest address;
  • Jurisdiction of residence for tax purposes;
  • Date when Individual with Significant Control obtained significant control and ceased to hold significant control of the Corporation;
  • Description of how the Individual with Significant Control has significant control of the Corporation;
  • Description of the reasonable steps taken by the Corporation in each financial year to ensure the Register is complete and accurate; and
  • Any other prescribed information as set forth in any regulations (which are yet to be determined).

Shareholders are responsible for replying accurately to the Corporation when it requests information, to the best of their knowledge. In turn,  the Corporation is responsible for creating and maintaining the Register and updating it once every year as well as within 15 days of being informed of a change. Every director, officer or shareholder who knowingly acts in contravention of these duties will be liable to a fine of up to $200,000, or up to six months imprisonment, or both, and a Corporation that fails to comply with its obligations respecting its Register faces fines of up to $5,000.

Corporations Canada has prepared general information on the topic that Corporations can use as a guide when preparing their Individual with Significant Control Register.  Additional materials will be published at http://www.ic.gc.ca/eic/site/cd-dgc.nsf/eng/home as more information becomes available. Kindly note that we will continue to monitor and, where appropriate, provide guidance and any further updates.

Corporations Canada further expects all Corporations to be compliant with the amendments upon coming into force. No grace period will be given to non-compliant Corporations.

For many family businesses, control of long-term direction and management of the family corporation are key issues, particularly during times of growth or periods of succession. The Institute for Governance of Private and Public Organizations (“IGOPP”) recently published a new policy paper that should be of interest to family businesses and their advisors in planning the capital structure for their enterprises: The Case for Dual-Class of Shares, Policy Paper No. 11 (2019). The paper revisits[1] the state of dual-class public corporations in Canada, emphasizes their value to entrepreneurs, family businesses and Canadian society as a whole and makes a number of structuring recommendations, which are outlined below.

Continue Reading It Stays in the Family – Dual Voting Share Structures for Family Businesses

On April 8, 2019, the federal government introduced Bill C-97 to implement measures from its spring budget. The bill proposes amendments to many federal statutes, including several important amendments to the Canada Business Corporations Act (CBCA) relevant to both private and public companies. Our summary of the proposed changes is set out below, some of which deal with familiar issues, while others would introduce new requirements for companies.

Continue Reading Something old, something new: Proposed amendments to the CBCA in the 2019 budget implementation bill

If the Hillary Clinton email scandal wasn’t a clear enough lesson that one should not conduct “official” work using personal electronic communication tools (be it personal email, texts or other methods), a number of recent court decisions have required executives to produce communications from their personal accounts and devices. Executives and advisors should not assume that communications using methods other than corporate email will somehow be protected or otherwise not find the light of day in the event of a dispute or investigation.

Continue Reading Think Before You Send: The Legal Risks of Emails and Text Messages from Personal Accounts