The Canadian Securities Administrators (CSA) indicates in a staff notice published on Thursday that many of the new cryptocurrency offerings — also known as initial coin offerings (ICOs) or initial token offerings (ITOs) —it has reviewed meet the definition of securities and must comply with traditional securities law.
"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," the CSA says in its notice.
The regulators' assessment of whether specific offerings constitute securities involves examining "the economic realities of a transaction and a purposive interpretation with the objective of investor protection in mind," the CSA says.
Although companies have begun using ICOs/ITOs as a new way of raising funds in the past couple of years, the regulatory status of these transactions had not been clear.
And while companies may assert that their offerings are software products, not securities, "in many cases, when the totality of the offering or arrangement is considered, the coins/tokens should properly be considered securities," the CSA says in its notice. "In assessing whether or not securities laws apply, we will consider substance over form."
The CSA advises that to determine whether an investment contract exists, companies should consider whether a transaction involves: an investment of money in a common enterprise that's expected to generate a profit, largely due to the "efforts of others."
The CSA's notice aims to help provide guidance to financial technology firms, their advisors and investors about the possible application of securities laws, or derivatives laws, to these sorts of offerings.
"Businesses should consider if and how prospectus, registration and/or marketplace requirements apply to their cryptocurrency offerings," the CSA's notice says.
The regulators note that there has not been an ICO carried out under a prospectus in Canada so far, and that they expect most firms would rely on prospectus exemptions to complete their deals. Even so, disclosure requirements (and other rules) may apply, which can also create ongoing obligations, and may attract civil liabilities.
In addition, these financings may trigger registration requirements that involve know-your-client (KYC) and suitability obligations, among others. The notice indicates that it's possible that firms could meet these obligations "through a robust, automated, online process that incorporates investor protections. These investor protections could include limits on investment amounts and concentration, as well as risk warnings."
The CSA's notice also sets out considerations for cryptocurrency investment funds, including the possible application of prospectus and registration requirements to these vehicles, along with other issues such as valuation and custody requirements.
"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 CSA's notice says. "We welcome digital innovation and we recognize that new fintech businesses may not fit neatly into the existing securities law framework."
Last month, the U.S. Securities and Exchange Commission (SEC) issued its first report indicating that it believes that ICOs should often be treated as securities.
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