Initial Coin Offerings (ICOs) and Cryptocurrencies in Canada

1. September 2017
Initial Coin Offerings (ICOs) and
Cryptocurrencies in Canada
The Canadian regulatory authorities are taking a
cautious approach in dealing with companies
raising money via ICOs. It is proceeding on a case
by case basis, thereby evaluating the structure and
substance of each offering to determine whether
such an offering is compliant with the prevailing
securities regulations.
Staff Notice No. 46-307
On August 24, 2017, the Canadian Securities
Administration (CSA) issued a staff notice no. 46-
307 (Notice) explaining cryptocurrency
exchanges, coins and offerings, trade-in-securities,
when and what securities law shall apply,
prospectus requirements or exemptions offered
to companies, dealer registration requirements,
cryptocurrency investment funds and what
assistance companies can seek from the CSA.
The CSA acknowledges that cryptocurrency
offerings provide new opportunities for
businesses to raise capital and provide investors
new avenues for investments. At the same time,
CSA is concerned about protecting the investors,
managing market volatility, ensuring transparency
and managing the overall risk.
In the Notice, the CSA has stated that in assessing
whether or not securities laws should apply to an
ICO, it will consider substance over form. It will
consider every ICO as a unique offering and deal
with it based on its individual characteristics.
Further, to determine if securities laws should
apply to an ICO, the CSA has introduced a four-
prong test, which, if satisfied, would determine
whether or not a Coin is a security. The test
considers whether (i) there is an investment of
money, (ii) in a common enterprise, (iii) with the
expectation of profit (iv) which comes
significantly from the efforts of others.
Securities Law Requirements
If a coin/token offering by a company is classified
as a security, such offerings will have to comply
with the prevailing securities laws, which includes
the issuance of a prospectus/ offering
memorandum (OM) by the company and other
prevailing securities law requirements. Although
CSA acknowledges that fintech companies
publish whitepapers for their ICOs, it is of a view
that such whitepapers are not structured in the
same way as a prospectus or OM, and investors
must be provided with a document that complies
with the requirements of prevailing securities law.
This would involve extensive disclosure of
information by such companies to potential
investors.
Cryptocurrency Exchanges and Investment
Funds
While there are a number of exchanges such as
Quadriga, Quebex, and Morrex dealing in
cryptocurrencies in Canada, no exchange is yet
recognized or regulated by the Canadian
authorities. The CSA has stated in the Notice that
if an exchange offers cryptocurrencies that are
classified as securities, it is required to apply to
that jurisdiction's securities regulatory authority
for recognition or an exemption from
recognition.
The CSA acknowledges that investment funds
are being set up in this space to get investors to
invest in such funds, which in turn will invest in
Bitcoin and/or other cryptocurrencies. In doing
so, the fintech companies that establish such
investment funds must keep in mind that they will
be required to register such investment funds
(including dealers, advisors and/or investment
fund managers), value the investment fund’s
cryptocurrency portfolio, make arrangements for
a custodian having expertise in holding
cryptocurrencies and make such other
considerations.

2. September 2017
CSA Regulatory Sandbox
The CSA has come up with an initiative called the
“CSA Regulatory Sandbox (Sandbox) to support
fintech companies that have innovative product
offering. The Sandbox endeavors to bring such
offerings within the prevailing securities
regulations by allowing such ventures to register
and/or seek registration exemptions. A recent
example of this initiative is the first legal ICO by
Impak Finance. The CSA evaluated the offering
by Impak using the four-prong test mentioned
above and categorized the Impak Coin as a
security. Hence, the Impak Coin is considered to
be in compliance with Canadian security laws.
Further, the Sandbox would encourage fintech
companies to engage with the securities
regulatory authorities in finding a mutually
beneficial route to bring such venture to the
market, encourage financial market innovation
and facilitation of capital raising by fintech
companies.
Gagnier Margossian LLP advises its clients on
navigating the legal challenges associated with
Initial Coin Offerings.
Learn more about
Gagnier Margossian LLP’s
ICO Advisory Services.
Questions? Contact GAMALLP
Christina M. Gagnier
gagnier@gamallp.com
+909.493.6447
Stephanie Margossian
margossian@gamallp.com
+415.692.1202