Canadian Regulators: ‘Many’ ICO Tokens Meet Securities Definition

Securities regulators in Canada have released a wide-ranging statement on initial coin offerings or ICOs.

The staff notice on “Cryptocurrency Offerings” from the Canada Securities Administrators (CSA) – an umbrella group composed of the country’s regional and local securities watchdogs – provides the clearest indication yet as to how regulatory bodies plan to oversee the emerging funding model.

The release comes after regulators in Ontario published an advisory on ICOs in March, and just under a month after the US Securities and Exchange Commission stated that its rules may apply to some token sales.

The notice outlines the requirements for companies involved in the launch and management of ICOs, as well as the exchanges that later list those assets for trading. Perhaps most notably, it reveals that “many” of the digital tokens investigated by regulators in Canada fall under the definition of a security, thereby triggering a range of legal requirements.

As the notice states:

“We have received numerous inquiries from fintech businesses and their legal counsel relating to ICOs/ITOs. With the offerings that we have reviewed to date, we have in many instances found that the coins/tokens in question constitute securities for the purposes of securities laws, including because they are investment contracts. In arriving at this conclusion, we have considered the relevant case law, which requires an assessment of the economic realities of a transaction and a purposive interpretation with the objective of investor protection in mind.”

This sentiment – that such tokens are more likely to fall under the definition of a security – is echoed elsewhere in the notice, where staffers point out that some ICO promoters have “[taken] the position that the coins/tokens are not subject to securities laws.”

“However, in many cases, when the totality of the offering or arrangement is considered, the coins/tokens should properly be considered securities,” the CSA wrote. “In assessing whether or not securities laws apply, we will consider substance over form.”

The notice, which is republished below, also includes guidance for firms looking to create cryptocurrency investment funds in Canada. It further invites firms that are interested in launching an ICO to consider signing up for a so-called regulatory sandbox, through which new financial products can be tested in a limited setting.

“In order to avoid costly regulatory surprises, we encourage businesses with proposed cryptocurrency offerings to contact their local securities regulatory authority to discuss possible approaches to complying with securities laws,” the notice states, adding:

“We welcome digital innovation and we recognize that new fintech businesses may not fit neatly into the existing securities law framework.”

The full staff notice can be found below:

Csa 20170824 Cryptocurrency-Offerings by CoinDesk on Scribd

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