With the regulatory environment surrounding security token offerings (STOs) changing continuously around the world, it is essential to keep tabs on the latest developments. Canada has come out to be an STO-friendly jurisdiction, provided the token sale is conducted within the country’s approved guidelines. In this post, we are going to analyse the STO regulations in Canada and list some critical regulatory guidelines that every STOs must follow.
STO Regulations in Canada
What Canadian Securities Administrators think of ICOs/STOs
The Canadian Securities Administrator released a regulatory sandbox for ICOs/STOs, describing various guidelines a business involved in these financial instruments must apply.
The Canadian regulator has made it very clear that many businesses marketing their digital tokens as software products have assumed an exempt status from the securities law even though these turn out to be securities upon considering the totality of the offering. Although, the regulator has made it clear that every business is different and these examinations are done on a case-by-case basis.
Four-Prong Test for Securities
According to the Canadian Securities Administrators, the business must ensure that their offering doesn’t satisfy the four-prong test to be exempted from the securities law.
Four questions to get involved with ICOs/STOs
1. An investment of money
2. In a common enterprise
3. With the expectation of profit
4. To come significantly from the efforts of others.
If the offering satisfies these conditions than it is considered as securities offering and the business must follow the additional regulations before registration.
Additional Requirements: Prospectus and Registration Guidelines
The CSA has set apart strict guidelines for issuing prospectuses and offerings memorandums (OM) for investors prior to the token sale event. The business has to follow regulatory directions while drafting the prospectus or OM. The only exception to not having a prospectus or OM is when the business has proven exemption from the securities law to the respective regulatory body.
Some of the key information points every OM must contain are:
- description of the business
- description of the ecosystem under which the token would be used
- minimum or maximum contributions from individual investors
- use of funds by the organiser
- timeline of the token sale
- any financial properties of the token such as return on investment
- liquidity or exit strategies
- the number of tokens held by the management.
In addition to these details, the OM must provide clarity on the project’s roadmap or ongoing updates, complete identities and background information of the management team, and any material risks involved in investing.
According to the CSA, businesses involved in the token release for a business purpose (business trigger) must seek a dealer registration before the token sale event. Additionally, companies that qualify for the business trigger must meet some financial obligations to their investors including Know-Your-Customer (KYC) details and other suitability requirements. Furthermore, these businesses must have a strong compliance system in place to handle cybersecurity risks and protect their investors’ data.
The CSA further suggest ICO/STOs seek legal guidance while going through the entire registration/approval process. As cryptocurrency enthusiast, one could expect clearer guidelines to come through as STO regulations in Canada receives more attention.