The emergence of ICOs and the associated regulatory concerns (Part 2 of 2)
Last week’s article provided an understanding of initial coin offerings, also known as “utility tokens”, and the different forms they take on to provide utility for purchasers.
This second part of the mini-series will discuss the security regulations of tokens in Canada.
Security Regulations of Tokens
Each class of tokens will have unique features and characteristics. The distinction of “utility tokens” is important because such tokens are less likely to be considered as securities.
Whether tokens issued under an ICO are considered “securities” under Canadian law and trigger regulatory scrutiny is a question that must be assessed on a case-by-case basis.
The problem with this approach, however, is that participants are largely reliant on hindsight. This post-fact analysis has resulted on calls for Canadian regulators to provide increased clarification on how certain features of tokens may be treated under securities law.
The inclusion of Simple Agreement for Future Tokens (SAFT) in ICOs is one strategy that has been developed to mitigate regulatory risk.
In essence, the SAFT framework aims to separate ICOs into two phases: an “investment” stage, and a “functional” stage.
During the “investment stage”, an issuer raises money in compliance with securities law through investment contracts with accredited investors. At a later stage when the tokens are “functional” (i.e. can be used for future goods and services produced by the company), tokens are distributed to the accredited investors which can then be freely traded.
The SAFT model has gained traction in the US, but to this date it has yet to surface in Canada on a large scale. In any event, its far from clear whether SAFT-modelled ICOs will be exempt from regulation as securities. While ICOs hold promise of an exciting mechanism to raise capital at lightning speed with little costs, the verdict is still out as to the treatment of tokens under Canadian regulation.