As of late-July 2019, the Ontario Securities Commission (OSC) has announced it has reached a $50,000 settlement with Initial Coin Offering (ICO) consultant CoinLaunch. The regulator says the penalty is modest, but shows how a mere consultant— not just an issuer, seller, or buyer of tokens— can be subject to securities laws.
ICOs and Securities Laws in Canada Explained
CoinLaunch has agreed to pay a $50,000 penalty to the OSC after advising two ICOs. The consultations included BCZERO and ECOREAL. Both ICOs were later determined to constitute securities offerings, says the OSC.
CoinLaunch developed whitepapers, websites, was involved in token creation, and even advised on token sale operations.
As a result, the securities regulator determined that the services provided by CoinLaunch were instrumental in soliciting unregistered securities to investors.
The OSC says the $50,000 penalty is light, which is due to cooperation from CoinLaunch. The company claims they were unaware of any securities registration requirements, and took remedial steps such as deleting the private keys to any tokens received as compensation.
From a broader perspective however, the CoinLaunch case shows how a consultant— who is neither an issuer nor a buyer of unregistered securities— can face legal penalties.
According to commercial litigator Evan Thomas,
“Although regulators cracking down on ICOs have tended to focus on issuers, the big lesson here is that securities laws can apply to activities beyond issuing tokens, including activities that don’t involve buying or selling tokens.”
Are All ICOs Securities Offerings?
The ruling as to whether or not an ICO constitutes a securities offering depends largely on the jurisdiction of the company hosting the offering.
In the United States, Securities and Exchange Commission (SEC) Chairman Jay Clayton has said that nearly every ICO he has seen, minus Etherum, is a securities offering.
As a result, Clayton says all ICOs operating under the SEC’s jurisdiction must abide by the SEC’s existing securities laws. He “is not going to change laws just to fit a technology”.
The result has been the subsequent decline of the ICO, and the rise of the Security Token Offering (STO).
In differing from the ICO, STOs abide by their jurisdiction-appropriate securities laws. In this sense, they bring the benefits of blockchain technology to the regulated realm of traditional financial securities— an industry valued at a whopping $544 trillion.
To date, regulated real-world assets including equity, real estate, investment funds, and even fine art have been tokenized.
Recent analysis suggests the nascent industry has totaled 64 successful STOs which saw nearly $1 billion in investments.
What do you think of the increased regulatory enforcement from securities regulators targeting ICOs? Let us know what you think in the comments section below.
Image courtesy of the OSC.