Tokenized collectibles, such as rare Pokémon cards and sports trading cards, that were offered and traded by Liquid Marketplace (LP), amounted to securities, Ontario’s Capital Markets Tribunal has found.
The panel handed down its decision today in an enforcement case brought by the Ontario Securities Commission (OSC) against Liquid Marketplace Inc. and Liquid Marketplace Corp., along with a trio of executives at the firms, co-founders Ryan Bahadori and Amin Nikdel, and LMP’s chief financial officer, Dennis Domazet. The OSC case alleged the two firms and the execs violated securities law by creating, selling and trading tokens that represented fractional interests in various collectibles.
At the heart of the case was whether tokenized collectibles qualify as securities — a question that underlies any determination of whether securities law was violated.
In its decision, the panel concluded that the tokens created in this case do amount to securities — followed by findings that certain respondents violated registration and prospectus requirements, and perpetrated a fraud on investors.
According to the decision, on the fundamental question of whether tokenized collectibles can be considered securities, the tribunal found that, in this case, they meet that definition. The tribunal reasoned that they qualified as “investment contracts” since investors acquired the tokens with the hope of generating profits that depended, at least in part, on the efforts to LMP to create the tokens and facilitate trading in them.
“Given the dependence that investors in these LMP tokens had on LMP to create the tokens, authenticate, appraise, store and insure underlying collectibles, run the LMP platform appropriately, facilitate buying and selling and maintain ownership records, we conclude that these circumstances are sufficient to establish that the LMP tokens, together with any related rights, terms and conditions, involved an investment contract and required that purchasers receive the protection of securities law,” the panel concluded.
After ruling that the tokens were, in fact, securities, the tribunal also concluded that the respondents violated securities law — including that LMP traded without registration, distributed securities without a prospectus, and operated a marketplace without registering as an exchange or an alternative trading system.
It also found that Bahadori, Nikdel and LMP misrepresented the core attributes of the tokens, and the underlying collectibles, to investors, among other violations.
“Purchasers did not receive what had been represented to them, and their pecuniary interests were placed at risk,” the panel found.
At the same time, the panel found that, as directors and officers, Bahadori and Nikdel were liable for LMP’s misconduct, but that Domazet was not liable, as he “raised concerns rather than quietly accepting or agreeing to the conduct.”
“The commission did not establish that he knew of LMP’s registration, prospectus or marketplace breaches, ” it said.
Additionally, the panel found that, while Nikdel made a misleading statement to the OSC, the regulator failed to prove similar allegations against Bahadori and Domazet.
A future hearing will be held to determine any sanctions in the case.