ICO / token sale
Companies and projects have increasingly relied on the sale of digital assets, or tokens, as a means of fundraising. These tokens generally do not grant the holders an ownership interest in the issuing company or project, but may provide governance rights, access rights or other utility. This has been conducted through public sales known as initial coin offerings (ICOs), proliferation through token generation events (TGEs) or private sales, among other mechanisms. While showing characteristics of traditional methods of fundraising, there are a range of unanswered questions related to the legal classifications of such products. As ICOs and TGEs will usually be distributed online and internationally, there is usually no single legal framework applying to such transaction, and the legal framework of each market in which the tokens may be offered or sold needs to be considered.
Attitude of the country towards ICOs/token sales
ICOs were popular several years ago; however, there are not many new ICOs being listed. The social climate is positive while the political climate lags behind.
Presence of any explicit regulation on ICOs and the issuance of token/coins
Presence of any explicit restrictions on ICOs or the issuance, distribution and/or transfer of token/coins
There are many restrictions to issue and distribute ICOs. Initial assessment is whether the ICO is a utility-type token (minimal regulations) or a security token (numerous regulations). Getting the utility token distributed and the related regulations depends on the market exchange requested. Transfer of token/coins B2B or B2C can be readily implemented.
Obligations and requirements to issue token/coins
If the token/coin is a utility token, there may be some provincial regulations. This depends on the purpose of the utility token (for example, for an agricultural Native Asset token, there could be provincial agricultural regulations). If a security token is offered, as above, numerous and expense regulations are to be complied with. The most cost-effective way to issue a security token is via a prospectus or offering memorandum. Typical security regulations relate to security token issuance.
Classification of token/coins in the jurisdiction
It is a question of fact whether the token/coin is a currency/payment instrument or security or investment product. Each province has similar definitions for what a security or investment product is. Once the purpose of the token/coin is clearly understood, then applicable regulations, if any, can be analysed.
Presence of a duty to publish a prospectus bevor offering token/coins to investors
Yes, if the token/coin is within the provincial definition of a security.
Presence of AML/KYC requirements that are needed to be fulfilled regarding (i) the initial issuance of token/coins and (ii) any following transfer of token/coins to third parties
Typically, AML/KYC requirements are to be fulfilled for those acquiring the token/coin. The transfer of token/coins is somewhat regulated and depends on if the transfer is via market exchange to market exchange or OTC.
Additional comments regarding (i) the legal situation for ICOs/token/coins and (ii) any following transfer of token/coins to third parties
Market size for ICOs/token sales and existence of any previous regulated ICO/token sales in the jurisdiction
Market size for ICO/Token sales is in the billions of dollars daily. Regulated ICO/token sales take place every day in Canada.
Additional comments regarding the economic situation for ICOs/token sales or what companies must be aware of in this business area