Share This Post

Canada / Main Slider




Cryptocurrency offerings can be in the form of initial coin offerings(ICO), initial token offerings(ITO) and sales of securities of cryptocurrency investment funds. These offerings provide new opportunities for businesses to raise capital and for investors to access a broader range of investments. However, they can also raise investor protection concerns, due to issues around volatility, transparency, valuation, custody, and liquidity, as well as the use of unregulated cryptocurrency exchanges. Investors may also be harmed by unethical practices or illegal schemes, and may not understand the properties of the investment products that they are purchasing.

The Securities laws in Canada will apply if the person or company selling the securities is conducting business from within Canada or if there are Canadian investors. Businesses should consider the requirements applicable to their cryptocurrency offerings and ensure their compliance as is specifically prescribed in this Staff notice:

  • Securities may be sold only after a receipt has been received from a securities regulatory authority  for a comprehensive disclosure document called a “prospectus”, or pursuant to a private placement in reliance on  a prospectus exemption;
  • Businesses and individuals in the business of trading in or advising on securities must be properly registered or rely on an exemption from registration; and  
  • A platform that facilitates trades in coins/tokens that are securities may be a marketplace and need to comply with marketplace requirements or obtain an exemption from such requirements.


Cryptocurrency exchange:

  • Cryptocurrency exchanges are online exchanges that allow investors to buy and sell cryptocurrencies. This can be made using either fiat currency(e.g., buying bitcoins using CAD or USD) or cryptocurrency(e.g., buying bitcoin using another cryptocurrency such as ether). In addition to this, cryptocurrency exchanges may also offer coins/tokens that have been sold pursuant to ICOs/ITOs.
  • A cryptocurrency exchange that offers cryptocurrencies as securities must determine whether it is a marketplace and if so, are required to comply with the rules governing exchanges or alternative trading systems. If an exchange is within the jurisdiction of Canada, it must apply to that jurisdiction’s securities regulatory authority for recognition or exemption from recognition.


Coin and Token offerings:

  • Background:
    • ICOs/ITOs are generally used by start-up businesses to raise capital from investors through the internet. The investors can purchase them in exchange for fiat currency or a cryptocurrency such as bitcoin or ether.
    • The structures of ICO/ITO will vary and may be used to raise capital for a variety of projects such as the development of a new cryptocurrency, distributed ledger technology(DLT), service or platform.
    • In many ways, an ICO/ITO can be very similar to an initial public offering(IPO). The coins/tokens can be similar to traditional shares of a company because their value may increase or decrease depending on the success of the business and the execution of its plan using the capital raised.
  • Trade in securities:
    • The businesses may market their coins/tokens as software products, thus positioning itself to be not subject to securities laws. However, in many cases, when the totality of the offering or arrangement is considered, the coins/tokens are regarded as securities. The nature of the substance and not its form will be considered when assessing whether or not securities law may apply.
    • Although a new technology may be involved, and what is being sold is referred to as a coin/token instead of a share, stock or equity, a coin/token may still be a “security” as defined in securities legislation of the jurisdictions of Canada.
    • Every ICO/ITO is unique and must be assessed on its own characteristics.  For example, if an individual purchases coins/tokens that allow him/her to play video games on a platform, it is possible that securities may not be involved. However, if an individual purchases coins/tokens whose value is tied to the future profits or success of business thus forming an ‘investment contract’, they will likely be considered as securities. This conclusion has arrived after the consideration of a judicial precedent (Supreme Court of Canada’s decision in Pacific Coast Coin Exchange v. Ontario) which requires an assessment of the economic realities of a transaction and a purposive interpretation with the objective of investor protection in mind.
    • To determine whether an investment contract exists, businesses should apply the following four-prong test; namely, does the ICO/ITO involve:
    1. An investment of money;
    2. In a common enterprise;
    3. With the expectation of profit; and
    4. To come significantly from the effort of others.


Application of Securities Laws

  • Prospectus requirement or exemption:
    • To date, no business has used a prospectus to complete an ICO/ITO in Canada; thus there is an anticipation that businesses looking to sell ICO/ITO may do so under prospectus exemptions:
      • Sales made to investors who qualify as “accredited investors” under the securities laws, need to be made in reliance on the accredited investor prospectus exemption;
      • Sales made to retail investors who do not qualify as “accredited investors, need to be made in reliance on the ‘offering memorandum’ (OM) prospectus exemption.
    • Some fintech businesses publish whitepapers for their ICOs/ITOs, which may describe things such as fundraising goals, the business, the project for which capital is raised, how many tokens/coins the management will retain and how long the offering will remain open. Although the whitepapers are a form of disclosure, they are not often structured as a prospectus or OM. The investors must be provided with documents that comply with the disclosure requirements of securities laws that trigger certain ongoing obligations and other protections for investors. Failure of this compliance can attract civil remedies against persons or companies that provide such whitepapers.
    • Conditions to be met for businesses relying on the OM prospectus exemptions are:
    1. Meeting the content requirements for the document;
    2. Obtaining a signed risk acknowledgment form from each investor;
    3. Complying with investor investment limits, as required;  
    4. Providing audited annual financial statements and ongoing disclosure to investors, as required;
    5. Complying with resale restrictions, which will generally preclude coins/tokens from trading on cryptocurrency exchanges; and
    6. Filing reports of exempt distribution with the securities regulatory authorities.

Any disclosure provided to investors, whether an OM or otherwise, must not be false or misleading. The disclosure must focus on material facts and be relevant, clear, balanced, in plain language and not overly promotional.

  • Registration requirement or exemption:
    • Businesses completing ICOs/ITOs may be trading in securities for a business purpose (referred to as the “business trigger”), therefore requiring dealer registration or an exemption from the dealer registration requirement.
    • The following factor is important considerations for determining whether a person or company trading in securities for a business purpose:
      • Soliciting a broad base of investors, including retail investors;
      • Using the internet, including public websites and discussion boards, to reach a large number of potential investors;
      • Attending public events, including conferences and meetups, to actively advertise the sale of the coins/tokens; and
      • Raising a significant amount of capital from a large number of investors.
    • Individuals or businesses that meet the business trigger must meet fundamental obligations to investors, including know-your-client (KYC), suitability, verifying investors identities and collect sufficient information to ensure that purchases of coins/tokens are suitable.
    • Persons or companies facilitating ICOs/ITOs of coins/tokens that are securities must have strong compliance systems in place, with policies and procedures that address cybersecurity risks. As cyber attacks are becoming more frequent, complex and costly, businesses in the cryptocurrency space should ensure that they have strong cybersecurity measures to safeguard the business and its investors.


Cryptocurrency investment funds

Fintech business looking to establish a cryptocurrency investment fund must consider the following:

  • Retail investors: In certain jurisdictions of Canada, the OM prospectus exemption cannot be used by investment funds to distribute securities to investors. Therefore, if investors in the investment fund will include retail investors, businesses will need to consider prospectus requirements, applicable investment fund rules and whether the investment is suitable.
  • Cryptocurrency exchanges: Due diligence must be completed on any cryptocurrency exchange that the investment fund used to purchase or sell cryptocurrencies for its portfolio, including on whether it is regulated in any way and the cryptocurrency exchange’s policies and procedures for identity verification, anti-money laundering, counter-terrorist financing, and recordkeeping. Businesses should be prepared to discuss with staff how trading volumes on the cryptocurrency exchanges that the investment fund intends to use may affect the ability to buy and sell cryptocurrencies and to fund redemption requests.
  • Registration: Businesses must consider appropriate registration categories in respect of the investment fund, including dealer, adviser and/or investment fund manager.
  • Valuation: How will cryptocurrencies in the investment fund’s portfolio be valued? How will securities of the investment fund be valued? Will one or multiple cryptocurrency exchanges (s) be used; and how will such exchange(s) be selected? Will there be an independent audit of the investment fund’s valuation?

Custody: Securities legislation of the jurisdictions of Canada generally require that all portfolio assets of an investment fund be held by one custodian that meets certain prescribed requirements. We expect a custodian to have expertise that is relevant to holding cryptocurrencies. For example, it should have experience with hot and cold storage, security measures to keep cryptocurrencies protected from theft and the ability to segregate the cryptocurrencies from other holdings as needed.

Share This Post

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>