ICO Promoters Can Expect Canada to Be as Tough as the US

On Aug. 24 of last year the Canadian Securities Administrators published CSA Staff Notice 46-307 on cryptocurrency offerings, in which the authors posit that "[A] coin/token may still be a 'security' as defined in securities legislation of the jurisdictions of Canada.

The Staff Notice goes on to confirm that Canada, through the seminal Pacific Coast Coin Exchange v. Ontario Securities Commission.

Although the authors of the Staff Notice admit that "Every ICO/ITO is unique and must be assessed on its own characteristics," we believe provincial securities regulators in Canada wouldn't take a radically different approach than the U.S. Securities Exchange Commission in analyzing whether tokens and coins are securities.

We believe the provincial securities regulators in Canada would be as equally inquisitive and systematic as the SEC has reportedly been in its recent analysis of Simple Agreement for Future Tokens contract based coin and token offerings.

The fact is, existing Canadian securities laws would probably already categorize most ICO tokens and coins as investment contracts, no matter how novel and supposedly unique they are.

Around the time of the publication of the OSC Staff Notice, a number of provincial securities regulators granted limited relief from dealer registration requirements under securities laws where coins issued in an ICO were offered as securities.

In our opinion, the two aforementioned examples demonstrate that where coins are issued in an ICO not only might they be treated as securities, but if exemptive relief from some securities laws is granted by a securities regulator, the relief won't be dramatic or earth shattering.

Further, the coins in each ICO are subject to resale restrictions under securities law which impose a fairly stringent hold period where further trading and transfer of the coins are prohibited indefinitely.

Unlike shares of a corporation, at the time a coin is traded on the blockchain, it may have its intended utility and essentially lost any security characteristic it initially had. All told, ICO promoters should exercise caution in Canada when attempting to market a utility token without consideration of securities laws.

Further, if you've come to accept that your token is an investment contract, then based on these decisions, expect to be treated like any other issuer of securities.