Initial coin offerings or "ICOs" have attracted the attention of the SEC, which has indicated that it may consider certain cryptocurrency tokens sold in these ICOs to be "securities," subject to regulation under U.S. law. In a recent Notice to FinTech businesses, Canadian regulators have signaled that they are following suit.
The Canadian Securities Administrators ("CSA"), a group of regional and local securities regulators from across Canada, issued a statement emphasizing that cryptocurrency offerings often involve sales of securities. Recognizing that ICOs "can provide new opportunities for businesses to raise capital and for investors to access a broader range of investments," the CSA noted that these types of offerings raise significant investor protection concerns, "due to issues around volatility, transparency, valuation, custody and liquidity" as well as the potential for investors to fall victim to fraudulent or unethical schemes.
Calling out businesses marketing their tokens as "software products" not subject to securities regulation, the CSA warned that they evaluate ICOs on a case-by-case basis and look at "substance over form," with "the objective of investor protection in mind." Given these objectives and the relevant case law, the CSA reported that in "many" of the numerous ICOs they reviewed, they found the tokens at issue to be investment contracts and, therefore, securities subject to regulation under Canadian securities law. The CSA did not identify those ICOs, which leaves token developers guessing as to what characteristics of the reviewed cryptocurrency tokens led the CSA to conclude that some were securities.
Like the SEC, the CSA did not state that every token issued in ICOs will necessarily be a "security." What is clear, however, is that more and more regulators are turning their focus and adapting the existing securities law framework to new technologies and funding models. They will be watching ICOs closely and warning FinTech businesses to consider carefully whether launching an ICO will run them afoul of the securities laws in any jurisdiction.
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