By: Andrew Elbaz and Student-at-Law, Alexander Katznelson

On April 4, 2018, in a Notice to Issuers, the TSX Venture Exchange (“TSXV”) reminded those considering initial token or coin offerings (“ITO”) to refer to the Canadian Securities Administrators (“CSA") Staff Notice 46-307 Cryptocurrency Offerings (the “Staff Notice”), which provides a general overview of how securities laws in Canada may apply to ITO's. Among other things, the Staff Notice warned Issuers to consider whether their activities will trigger prospectus and/or registration requirements. The CSA stated that it will consider substance over form when determining whether the Issuer’s activities trigger the foregoing requirements.

Often, the starting point is to determine whether the tokens or coins will be classified as securities. This requires determining whether an ITO gives rise to a relationship that constitutes an “investment contract”. The Staff Notice refers Issuers to the following four limb test to determine whether an investment contract exists. Issuers must consider whether the offering involves:

1. An investment of money
2. In a common enterprise
3. With the expectation of profit
4. To come significantly from efforts of others

If an “investment contract” exists, Issuers are required to obtain a receipt from a securities regulatory authority for a prospectus or to rely on a prospectus exemption prior to conducting an ITO.

As noted above, the Staff Notice warned Issuers that conducting an ITO may trigger dealer registration requirements if the Issuer is considered to be trading in securities for a business purpose. However, Issuers have recently applied for and received relief from complying with registration requirements from the CSA Regulatory Sandbox.

Finally, in the Notice to Issuers, the TSXV offered an important reminder that irrespective of whether a coin or token is classified as a “security”, Issuers must ensure that they comply with all TMX Regulatory Policies, including, but not limited to:

• Policy 2.8 – Supplemental Listings;
• Policy 3.2 – Filing Requirements and Continuous Disclosure;
• Policy 3.5 – Restricted Shares;
• Policy 4.1 – Private Placements;
• Policy 4.3 – Shares for Debt;
• Policy 5.2 – Changes of Business and Reverse Takeovers; and
• Policy 5.3 – Acquisitions and Dispositions of Non-Cash Assets.

A full copy of the Notice to Issuers can be found at the following link: www.tsx.com/resource/en/1722

Please contact the authors, Andrew Elbaz and Alexander Katznelson, to discuss how securities laws and TMX Regulatory Policies apply to your business.