On June 11, 2018, the Canadian Securities Administrators (CSA) provided guidance on when an offering of cryptocurrencies such as coins or tokens, including ones that are commonly referred to as “utility tokens”, will be offering of securities. This is important because if the coin or token is considered a security, then the person issuing the coin or token must comply with provincial securities laws when doing so (i.e. file and clear a prospectus with securities regulators or rely on an exemption from those prospectus requirements). Failure to do so could give rise to statutory and civil liability including a requirement to return money to investors.
The key points from CSA Staff Notice 46-308 – Securities Law Implications for Offerings of Tokens are as follows:
- Most offerings of coins or tokens, including ones that are commonly referred to as “utility tokens”, involve securities since most constitute investment contracts, when the totality of the offering or arrangement is considered.
- When determining if an “investment contract” exists, consider whether the offering involves:
- An investment of money
- In a common enterprise
- With the expectation of profit
- To come significantly from the efforts of others.
- In analyzing whether an offering of tokens involves an investment contract, assess not only the technical characteristics of the token itself, but the economic realities of the offering as a whole, with a focus on substance over form.
- “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. CSA Staff have found that most of the offerings of tokens purporting to be utility tokens 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 CSA Staff Notice 46-308 contains 14 examples describing various fact patterns and the rationale in each case for determining whether one or more elements of an investment contract exists. If any of the four indicia of an investment contract appears to exist in an offering, the securities regulatory authorities will likely determine that such an offering involves a distribution of securities.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the business law group at Nerland Lindsey LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.