The Canadian Securities Administrators (CSA), comprised of the country’s thirteen key financial market regulators across their respective provinces, today took the first step towards controlling the new financial instrument coming out of the cryptocurrency community — initial coin offerings (ICOs), or token sales.
In a recent statement, the CSA stated that this new fundraising phenomenon should be categorised as securities, at least in some cases. This implies that certain ICOs/ITOs would now need to follow Canadian securities laws, which requires assessing the economic realities of the offering to protect participating investors.
In determining whether or not a cryptocurrency transaction could be deemed securities and therefore be subject to regulation, the CSA will check if the ICO/ITO involves:
- Investment of money
- A common enterprise
- Expectation of profit
- Significant efforts of others
To ensure that investors are sold investments that include all the proper disclosures, those who use ICOs to sell tokens registered as securities must sell their product to “accredited investors” to get an exemption from prospectus requirements. Otherwise, tokens sales to crypto-investors who do not qualify as accredited investors will need to use an offering memorandum (OM) prospectus.
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The regulator also noted that because investors need to obtain the essential facts behind any capital raising to allow them to make fully informed decisions, the so-called ‘whitepapers’ may not be enough for this purpose since “they are often not structured in the same way as prospectuses or OMs.”
Whitepapers are disclosure documents which describe the key elements of ICOs/ITOs, including fundraising goals, the projects for which capital is being raised, how many coins/tokens will be sold and how long the offering will remain open, etc.
On a related note, ICOs/ITOs will be subject to regulatory scrutiny for investors’ protection and those participating in unregistered offerings may be liable for violations of the securities laws.
The CSA said: “It should also be noted that investors may also have civil remedies against persons or companies that fail to comply with securities laws, including a right to withdraw from the transaction and/or damages for losses on the grounds that such transactions were conducted in breach of securities laws.”
Although the CSA did not clearly lay out enforcement actions at this time, it hinted that it will engage in more enforcement activity if ICO participants fail to comply with securities law requirements.