The Canadian Securities Administrators (CSA) released a Staff Notice this week (June 11, 2018) providing additional guidance on the securities law implications for offerings of coins and tokens. The notice was prepared by the CSA in response to common inquiries from cryptocurrency businesses and their advisors. Specifically, the notice addresses the sale of “utility tokens” and identifies scenarios where these sales may also have elements of investment contracts and be subject to securities regulation.
On the topic of utility tokens, CSA Staff Notice 46-308 states:
“We have received submissions from businesses and their professional advisors that a proposed offering of tokens does not involve securities because the tokens will be used in software, on an online platform or application, or to purchase goods and services. However, we have found that most of the offerings of tokens purporting to be utility tokens that we have reviewed to date have involved the distribution of a security, namely an investment contract. The fact that a token has a utility is not, on its own, determinative as to whether an offering involves the distribution of a security.”
The notice goes on to highlight a few common scenarios for proposed coin and token offerings that could give rise to various securities law implications. These scenarios include situations where:
- A token is intended to be used in the operation of software or an online application that does not yet exist or is still under development, or the token is intended to be used to purchase goods and services that are not yet available
- Tokens are not immediately delivered to buyers once purchased
- The stated purpose of the offering is to raise capital, which will be used to increase the coin or token’s value or support the business issuing the coin or token
- A business offering the coin or token or involved in its sale makes statements suggesting that the coin or token will become more valuable, or take other steps to create an expectation of profit
The CSA advises that any business seeking to offer coins or tokens to Canadians consult qualified securities legal counsel. The CSA also invites applications to the CSA Regulatory Sandbox, which allows fintech companies an opportunity to test and develop innovative business offerings in an environment where they can work collaboratively with regulators and have temporary exemption from some consequences of securities regulation that may otherwise apply. The sandbox approach to regulation is something that has also been pursued in Bermuda and the UK.
Who are the Canadian Securities Administrators (CSA)?
While most countries have national securities regulators, Canadian securities regulation is solely the jurisdiction of provincial and territorial governments. The Canadian Constitution divides powers between the federal and provincial government and gives provinces the jurisdiction to regulate property and civil rights. These provincial and territorial regulators are participants of the Canadian Securities Administrators, which is an organization that aims to promote consensus and harmonized regulations across the different jurisdictions.
What are “Staff Notices”?
Staff notices are issued either by a single regulator or by a group of regulators, such as the CSA. Staff notices do not change securities legislation, reporting requirements or other policies and procedures. Instead, the notices provide businesses and the public with insight into how regulators are interpreting and applying existing regulations. The notices often focus on recent issues or areas of concern for the regulator and attempt to provide guidance on these matters to businesses and other market participants.