On June 11, 2018, the Canadian Securities Administrators (“CSA”) published Staff Notice 46-308 Securities Law Implications for Offerings of Tokens (“Notice”).

The Notice follows from the CSA’s previous guidance in Staff Notice 46-307 Cryptocurrency Offerings, where the CSA explained that many cryptocurrency offerings involve the distribution of securities and are therefore subject to securities laws (including prospectus, registration, and/or marketplace requirements). The Notice expands upon this guidance to focus in particular on offerings of “utility tokens,” which 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.

The CSA explained that the fact that a token has a utility is not, on its own, determinative of whether an offering involves the distribution of a security. Most offerings of tokens which the CSA reviewed have involved the distribution of a security, namely an investment contract. In determining whether an offering of tokens involves the distribution of an investment contract, businesses and their advisors should consider and apply the case law interpreting the term “investment contract”, including whether the offering involves:

  1. An investment of money
  2. In a common enterprise
  3. With the expectation of profit
  4. To come significantly from the efforts of others

Examples of situations involving an investment contract

The Notice provides a non-exhaustive, illustrative list of examples of situations that may suggest the presence of an investment contract:

  • Platform not yet available. The proposed function of the token is to access or purchase goods and/or services on a software, online platform, or application, but that software, online platform, or application is yet to be made available to the holder of the token.
  • No immediate delivery. The token is not immediately delivered to purchasers.
  • Tokens as capital. The issuer states that the purpose of issuing the token is to raise capital.
  • Bounty program. The issuer offers free tokens or other benefits in exchange for promotion of the offering.
  • Management compensation. The issuer retains a significant number of tokens for its management as a form of compensation.
  • Reliance on management. The issuer has made representations that its management’s skills or expertise will likely increase the value of the token or that the token will have uses beyond the platform (for example, as a currency).
  • Finite number of tokens. Access to tokens, or the number of tokens issuable, is finite.
  • Disproportionate price-to-value. Issuer permits or requires the purchase of a large amount of tokens that does not align with the purported utility of tokens. For example, purchasing tokens in the amount of $100,000 that can be used only for downloading music for personal use.
  • Marketing to unlikely consumers. The offering targets persons who would not reasonably be expected to use the issuer’s product, service or application.
  • Representation by management. Management represents that the tokens will appreciate in value or compares them to other cryptocurrencies which have appreciated in value.
  • Tradeable on trading platforms. The tokens are reasonably expected or marketed to trade on one or more cryptoasset trading platforms or to otherwise be freely tradeable in the secondary market.

The CSA further expressed concern where offerings structured in multiple step are used in an attempt to avoid securities requirements. Regulatory and/or enforcement actions will continue against businesses which do not comply with securities laws.

While the Notice provides much needed guidance on token offerings, businesses must keep in mind that every token offering is unique and requires a detailed analysis of its characteristics to determine the applicability of securities laws. For more information or advice, please contact our cryptocurrency team at Norton Rose Fulbright Canada LLP.

The author would like to thank Alexandra David, summer student, for her assistance in preparing this legal update.

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