Canadian Securities Administrators says ICOs must consider securities laws

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The Canadian Securities Administrators (CSA), which coordinates regulation for Canada’s capital markets, has released a staff notice addressing the rise of initial coin offerings.

The statement — which broadly refers to cryptocurrency exchanges like initial token offerings — says that many offerings it has reviewed constitute securities, and must comply with traditional securities laws. It also goes into steps that FinTech companies can take to comply with securities laws.

“Although a new technology is involved, and what is being sold is referred to as a coin/token instead of a share, stock, or equity, a coin/token may still be a security; as defined in securities legislation of the jurisdictions of Canada,” the report says. “Businesses should complete an analysis on whether a security is involved.”

The CSA suggests that FinTechs get in touch with the organization’s FinTech sandbox, which supports businesses navigating regulations. It also suggests contacting local securities regulatory authorities to learn how to comply with securities laws.

“The technology behind cryptocurrency offerings has the potential to generate new capital raising opportunities for businesses and we welcome this type of innovation,” said Louis Morisset, CSA Chair and president and CEO of the Autorité des marchés financiers. “Given the growing activity in this novel area, we are publishing guidance to help FinTech businesses understand what obligations may apply under securities laws.”

The CSA said that many ICOS can constitute securities because they are investment contracts, where the ICO involves an investment of money in a common enterprise with the expectation of profit.

The statement was released just as many companies are launching cryptocurrency exchanges — one of the most recent and notable being Kik, which announced its intention to launch the Kin ecosystem.

UPDATE: 08/24/17 @ 6:53 P.M.:

Ashley Goldstein, communications manager at Kik, said that the CSA statement is similar to a recent US Securities and Exchange Commission ruling, which said that its rules may apply to some token sales.

“We’re doing a lot of work to make sure our token is classified as a utility token, as opposed to a security (this is done via the Howey Test). Our plans have not changed in light of either ruling,” Goldstein said.

UPDATE: 08/28/17 @ 10:23 A.M.:

After his LinkedIn article on VC participation in ICOs, BetaKit reached out to OMERS Ventures managing director Jim Orlando for his thoughts:

“On a worldwide basis, this year there have been over $1.5 billion in total purchases in over 100 ICOs. This has included a few by Canadian entities and more are planned. ICO participants want to stay on side of the appropriate securities laws and the regulatory clarity is an important piece of the process.”

He added that the regulations might slow down companies that haven’t considered the implications of regulations, but “For the most part, companies can now have certainty around what regulations are applicable and hence should be able to move forward more quickly.”