The Canadian Securities Administrators published guidance regarding how securities and derivatives laws in Canada might be impacted by initial coin offerings and the sales of investment funds consisting of digital tokens. Generally, according to CSA, Canadian law requires (1) the use of approved disclosure documents prior to a sale of securities, unless the sale is conducted pursuant to a private placement in reliance on a prospectus exemption; (2) the registration of businesses and persons involved in the trading or advising of securities, unless there is an exemption; and (3) the compliance with marketplace requirements for platforms that trade securities, unless there is an exemption.

In its summary, the CSA noted that, to date, no digital token exchange has been recognized as an exchange in any Canadian jurisdiction or exempted from registration.

As in the US, token sales associated with an ICO may be considered a security in Canada, said the CSA, if it involves an investment of money in a common enterprise with the expectation of profit arising significantly through the efforts of others. Prospectus exemptions may be available for sophisticated investors known as “accredited investors.”

CSA indicated that businesses undertaking ICOs may be trading in securities for a business purpose and thus require registration unless there is an exemption. CSA stated that determinations of whether trading is for a business purpose include whether the business is soliciting a broad group of investors, including retail persons; using the internet to reach a broad group; attending public conferences and advertising to solicit a broad group; and raising a large amount of funds from a broad group.

Legal Weeds: The CSA advisory makes clear that regulator issues related to the offer and trading of digital tokens is not solely a US phenomenon. On July 25, the Securities and Exchange Commission published a Report of Investigation that concluded that digital tokens issued by an entity for the purpose of raising funds for projects – even if using distributed ledger or blockchain technology – may be securities under federal law. If so, such securities must be registered with the Commission or eligible for an exemption from registration requirements. Moreover, the SEC concluded that any person offering trading facilities like an exchange for digital tokens that are securities must be registered as a national securities exchange or be exempt from such registration requirement. (Click here for background on the SEC’s Report of Investigation in the article “SEC Warns that Digital Tokens May Be Securitas” in an August 3, 2017 Advisory by Katten Muchin Rosenman LLP.)