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Tuesday, June 12, 2018

Read online or download the full update here.

On June 11, 2018, the Canadian Securities Administrators (the “CSA”) issued CSA Staff Notice 46-308 – Securities Laws Implications for Offerings of Tokens (the “Staff Notice”), which provides additional guidance on the applicability of securities laws to offerings of coins or tokens. The Staff Notice is timely in that the federal government issued long-awaited draft legislation[1] on June 9, 2018 in regards to the regulation of businesses dealing in virtual currencies.

The Staff Notice follows the August 24, 2017 publication of CSA Staff Notice 46-307 – Cryptocurrency Offerings (the “August Notice”) which presented preliminary guidance as to the applicability of securities laws in Canada to initial coin offerings (“ICOs”), initial token offerings (“ITOs”) and cryptocurrency exchanges. The August Notice indicated that, when the totality of an ICO or ITO offering is considered, most ICOs & ITOs involve the sale of securities and, in certain circumstances, these products may also be considered derivatives.

The Staff Notice (i) provides enhanced guidance as to whether or not a token offering may involve an offering of securities, with an emphasis on the concept of utility tokens, and (ii) examines offerings that are structured as a two-stage process whereby a purchaser agrees to contribute money in exchange for a right to receive tokens at a future date and a token is subsequently delivered.

1. Does the Offering Involve an Offering of Securities?

An offering of tokens may be an offering of securities if it involves the distribution of an investment contract. The considerations for interpreting whether or not a token or coin is an “investment contract” includes the application of the legal test that seeks to determine whether the offering involves: (i) an investment of money, (ii) in a common enterprise, (iii) with the expectation of profit, (iv) to come significantly from the efforts of others.

In the Staff Notice, the CSA reiterate that they will adopt a purposive interpretation in determining whether an investment contract exists and, in applying the doctrine of substance over form, will focus on the economic realities of the offering as a whole.

This includes examining how an offering is marketed and urging issuers to avoid relying on the technical characteristics of the token itself in order to support a view that the token has a utility (i.e., it is to be used in software, on an online platform or to buy goods and services).

To aid businesses considering an offering of tokens, the Staff Notice highlights several illustrative examples of features associated with ICOs and ITOs where the elements of an investment contract may exist. These examples include:

  • Bounty Programs: Where the issuer has established a “bounty” program offering free tokens to persons who promote the offering, the person participating in the promotion may have an incentive to make statements promoting the offering as an investment, which creates an expectation of profit.
  • Incentive Allocations: In many instances, an issuer’s management retains a significant number of unsold tokens from the offering or “pre-mines” a significant number of tokens before they are publicly available as a form of compensation for their efforts. The CSA indicate that this could demonstrate a common enterprise, as any future increase in the value of the tokens will financially benefit both management and the investor.
  • Capped Supply: Most offerings are structured with a finite number of tokens or where access to new tokens will be limited in the future. The Staff Notice indicates that, due to the limited or reduced supply of tokens, initial purchasers may have an expectation of profit as increased demand with limited or reduced supply should lead to an increase in price. In contrast, a continuous or unlimited supply of tokens may reduce the probability that purchasers buy with an expectation of profit.
  • Airdropping: The distribution of tokens for free will likely not involve an investment of money. However, the Staff Notice indicates that the distribution of free tokens as part of an overall sale of an ancillary or secondary product or service may involve an investment of money if it is appropriate to “look through” the token distribution to the investment of money in the overall offering.
  • Marketing and Resale on Cryptoasset Platforms: The Staff Notice addresses the reasonable expectation of purchasers as to the ability to trade tokens on a trading platform or to be otherwise freely tradeable in the secondary market. In considering this issue, the CSA indicate that they will consider the marketing of the offering as well as representations made formally or informally by the issuer, including social media representations, in determining whether tokens are being purchased with the expectation to resell them at a profit in the secondary market. 

The Staff Notice states that the possible absence of control over secondary trading (e.g. an ERC20 token) is generally not, on its own, relevant in assessing whether purchasers expect a profit and that an offering of a security token without resale restrictions could place persons trading the token offside resale restrictions.

In addition, anyone who directly or indirectly participates in the distribution of securities tokens will need to consider whether or not registration as a securities dealer may be required.

2. The Two-Stage Offering and Use of SAFTs

In considering offerings structured as a two-stage process, the Staff Notice examines the use of a simple agreement for future tokens or “SAFT” which provides for the purchase of a right to receive tokens at a future date. Through the use of a SAFT, no token is delivered at the time of the distribution of the SAFT sale. The CSA note that they may consider a token issued at a later stage to be a security, despite the fact that it has some utility.

The Staff Notice reminds issuers and purchasers that if a token issued pursuant to a prospectus exemption is a security, applicable resale restrictions require that any subsequent trade of that security must continue to be made in reliance on a prospectus exemption.


The Staff Notice demonstrates that the CSA’s analysis of the regulation of ICOs, ITOs and cryptocurrency exchanges is evolving but remains rooted in fundamental securities laws principles. CSA members have taken and intend to continue taking regulatory and/or enforcement action against businesses that have been involved with or plan to conduct ICOs and ITOs. All businesses participating in the space should be prepared to assess the economic realities of their offerings as a whole, with a focus on substance over form.

If you have any questions with respect to the matters discussed above, please contact Geoffrey Cher by email at, Amir Torabi by email at or any other member of our Structured Finance or Corporate Finance practice groups.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.