In a decision expected to be widely noted by the startup community, the Ontario Securities Commission (“OSC”) approved the first initial token offering (“ITO”, also known as an initial coin offering or “ICO”) in Ontario. The decision released October 17, 2017 comes in the wake of increasing innovation and market activity within the fintech and cryptocurrency space in Canada.
The applicant, Token Funder Inc. (the “Applicant”), is a blockchain business incorporated in Ontario seeking to offer a technology platform for businesses to raise capital through tokens, coins and other blockchain-based securities. In particular, the decision notes that the Applicant specifically intends for the platform to enable crowdfunding and private placements of blockchain-based securities.
To fund the completion of the platform, the Applicant applied for exemptive relief from dealer registration requirements pursuant to National Policy 11-203 — Process for Exemptive Relief Applications in Multiple Jurisdictions. Under Section 74 of the Ontario Securities Act (the “Act”), the OSC gave approval for the Applicant to conduct the ITO as a private placement under the offering memorandum prospectus exemption (a summary of which can be viewed here) for a 12-month period. In Ontario, the Applicant received exemptive relief from registration required by securities dealers under Section 25 of the Act. In other Canadian provinces and territories, the Applicant received exemptive relief under the passport system with the OSC designated as the principal regulator.
The exemptions were granted in the context of the Canadian Securities Administrators’ regulatory sandbox, launched in February 2017 (the “CSA Sandbox”), to support fintech businesses seeking to offer innovative products, services and applications. The CSA Sandbox allows firms to obtain exemptive relief from certain securities law requirements that may impede their innovative business models, provided that investor protection is not compromised.
Token Funder Inc. is only the second such fintech in Canada to receive approval for an ITO in the context of the CSA Sandbox. The first was Impak Finance Inc., which received an exemption from the dealer registration and prospectus requirements in August 2017. The Autorité des marchés financiers was the principal regulator in that case.
The Initial Token Offering
The Applicant’s ITO will involve the initial distribution of up to 200,000,000 of a total of 1,000,000,000 “FNDR Tokens” (the “Tokens”) with an approximate gross value of CAD $10,000,000. The Tokens, a digital asset created through a smart contract on the Ethereum blockchain, will be offered through the website of the Applicant. Potential investors are limited to a maximum investment equivalent to CAD $2,500 unless shown to be an “eligible investor” or “accredited investor” as defined in National Instrument 45-106 — Prospectus Exemptions.
Notably, this means that the ITO will be the first ITO approved by a securities regulator in Canada which is open to retail investors. Previous ITOs have usually relied on exemptions permitting tokens to be sold only to accredited investors, thereby limiting the opportunity for retail investors to participate in an offering.
The value of Ether, in cases where an investor chooses to subscribe for Tokens using such cryptocurrency, will be determined at the time that the subscriber completes the onboarding process and is approved for participation in the ITO. The Applicant must take reasonable measures to determine the value of Ether to ensure the $2,500 investment limit is not exceeded.
Importantly, the OSC’s approval outlined the following conditions to be satisfied by the Applicant, among others:
- The Applicant must conduct a know-your-client and suitability review and undertake to collect information from investors concerning investment needs and objectives, financial circumstances and risk tolerance. In particular, the Applicant must also conduct a survey to ensure that investors have a detailed understanding of cryptocurrency and digital token offerings.
- The Tokens must not be listed and traded on any exchange (including cryptocurrency exchanges) or any organized market without the OSC’s advance approval.
- In addition to fulfilling the reporting required under Ontario securities laws, the Applicant must provide to the OSC details of investor complaints within 10 days of receiving such complaints and make quarterly reports detailing average subscription amounts, total subscription amounts by region and any other information the OSC may reasonably request.
- Proceeds from the offering must be returned to subscribers if a minimum of CAD $500,000 is not raised. The smart contract established for purposes of the offering will automatically return funds to subscribers if the minimum capital raise does not occur.
While the OSC indicated that innovation and the fostering of capital raising were considerations that lead to the approval of this ITO, it cautions that the decision is based on the particular facts and circumstances of the Applicant and should not necessarily be seen as a precedent for other ITOs. Organizations considering an ITO or similar offerings are therefore well-advised to seek legal advice concerning their proposed activities.