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Cryptocurrency offering may come with regulatory requirements

With interest in the Canadian cryptocurrency market growing and attracting the attention of the nation’s securities regulators, fintech businesses need to be aware of the potential regulatory requirements of their offerings, Calgary business lawyer Cameron MacCarthy tells AdvocateDaily.com.

Until recently, MacCarthy, partner with Shea Nerland Law, says many people operating in the cryptocurrency space were not aware that what they are doing had any implications from a securities perspective — which may be the result of a failure to understand how securities regulations could apply and also the possibility that the current regulatory regime may not be well-suited to this market.

In addition, he says, although ‘first level’ interest in the Canadian cryptocurrency market is high, ‘second level’ activity — companies that are active in the space — is still significantly lagging in Canada when compared with other jurisdictions.

“I would say at the ground level, in terms of working with other entities and organizations on developing new cryptocurrencies, working at the software and technology level and then participating in this initial coin or token offering — most of that activity is happening overseas,” he says.

In August, however, the Canadian Securities Administrators (CSA) released a staff notice to provide guidance on the applicability of securities laws to cryptocurrency offerings, after the CSA noted an increase in the number of initial coin offerings, initial token offerings and sales of securities of cryptocurrency investment funds.

“Many of these cryptocurrency offerings involve sales of securities. 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,” says the notice. For some offerings, it says, prospectus, registration and/or marketplace requirements may apply.

The CSA notice, says MacCarthy, highlights a number of interesting developments for the industry in Canada.

“There is this acknowledgment within the notice itself by securities administrators that they ‘welcome digital innovation’ and recognize that new fintech businesses may not fit neatly into the existing securities law framework, so I think that’s a pretty big acknowledgment,” he says.

Also, says MacCarthy, "In the staff notice, the CSA positions that many of these cryptocurrencies are securities by the virtue of them being investment contracts.”

In light of the CSA’s recent focus on the issue, MacCarthy says fintech companies can anticipate increased interest and scrutiny by the regulators.

“I think that what you’ll probably see is the regulator trying to adjust the regulatory framework to cast that net a bit wider and if that happens, then if you haven’t done your securities analysis and assessment at the front end, you’re probably looking at increased cost and time to be compliant later on down the road,” he says.

As the potential consequences of operating in contravention of securities regulations can involve a costly and time-intensive rectification process, MacCarthy says there are several ways in which a lawyer can help successfully navigate the requirements before it gets to that stage.

First of all, he says, with any emerging industry, it is important to truly understand what the business is and how it is intended to operate.

"Once you get that understanding of all the data that you need, you can then figure out what the legal implications are,” he explains.

“The other question is why. It might be that you can get them to their objective by a different route that has fewer risks, or you’ve mitigated the risks from a regulatory standpoint,” MacCarthy adds.

The company can then undertake a technical analysis to determine whether or not the offering itself is an investment contract.

“If it’s not, then arguably it’s outside of the regulatory framework, and if it is then you’re arguably within it, and then I think people need to understand what the implications of being within the framework actually are,” he explains. 

For counsel trying to help a client navigate this regulatory framework, the suggestion from the securities administrators is one of collaboration, says MacCarthy.

“I think most lawyers will have had a different experience with the securities administrators, depending on who your clients are and how you interact with them, but I think this is one of those situations where being proactive and trying to work with the regulators is going to serve your client better,” says MacCarthy.

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