The Canadian Securities Administrators (CSA) issued a staff notice giving additional guidance on the application of securities laws to initial coin offerings (ICOs) and related tokens.Original guidance was published by the CSA in August 2017 outlining how securities laws may apply to ICOs, digital currency investment funds, and digital currency trading platforms. It states that many digital currency offerings “involve sales of securities.” It also outlined, that depending on the circumstances, some products were derivatives and hence subject to derivative legislation and regulatory requirements. The new publication titled “CSA Staff Notice 46-308 Securities Law Implications for Offerings of Tokens,” is an update to the original issue in 2017, and provides guidance for CSA staff. It is also essential reference for businesses conducting ICOs, and for investors to assess if a potential investment opportunity is credible and compliant.
The guidance is detailed across many features of ICOs and tokens and includes more specific references to utility tokens and multiple step ICOs. Investors may find these characteristics appear more frequently in the digital currency landscape today.
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The CSA has “engaged with numerous businesses” and found that most token offerings involve securities and that they have also received enquiries relating to utility tokens. “Utility token is an industry term often used to refer to a token that has one or more specific functions, such as allowing its holder to access, or purchase services or assets based on blockchain technology,” define the CSA.The notice goes on to explain that in many businesses offering tokens, the offering will involve securities despite the tokens having one or more utility functions. The aim of the notice, say the CSA, is to provide guidance “when an offering of tokens may or may not involve an offering of securities; and for offerings of tokens that are structured in multiple steps.”The CSA detail a number of possible scenarios to aid stakeholders in assessing ICOs, but with the overall theme that if an investment contract is provided by an ICO business the tokens are likely securities.
For ICOs with multiple steps the notice again outlines examples and scenarios confirming that a “token delivered at a second or later step is a security, despite the fact that the token may have some utility”. This is because when the token is delivered it has the features of security, or security-like attributes, such as profit-sharing interest. “We will have concerns where a multiple step transaction is used in an attempt to avoid securities legislation,” said the CSA in response to an increase in the number of multi-stage ICOs, and the assumed potential for less credible ICOs to attempt to bypass securities regulation. The guidelines go on to clarify the assessment of multiple step ICOs. Enforcement and compliance are also covered in the document with the CSA confirming it is conducting active surveillance to identify violations, and where they occur the CSA has taken and will continue to take regulatory or enforcement action. For compliance, the CSA encourages businesses with token offerings to consult local legal counsel on approaches to compliance with securities legislation and to contact provincial securities legislators, providing copies of whitepapers and other such documents.
It also reminds of the CSA Regulatory Sandbox which supports fintech businesses offering innovative products and services for Canada. The sandbox can provide registration and/or exemptive relief for securities requirements whilst new companies test their products, services, and applications. For exemptive relief to be considered firms must prove adequate investor protection. The digital currency ecosystem is quickly evolving to meet opportunities in the market, technological developments, and global regulation. Canada’s regulators are often prompt at meeting the need for both regulation and clarification, giving Canada’s blockchain and digital currency economy the chance to thrive, while still protecting investors and financial structures.Image credit: CSA logo
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