OSC al­lows a firm to of­fer an ICO via the of­fer­ing mem­o­ran­dum ex­emp­tion.

Investment Executive - - FRONT PAGE - BY FIONA COL­LIE

re­cent reg­u­la­tory ex­emp­tions granted to com­pa­nies in On­tario re­gard­ing ini­tial coin of­fer­ings (ICOs) rep­re­sent a sig­nif­i­cant shift within the fi­nan­cial ser­vices sec­tor.

In Oc­to­ber, Toronto-based To­kenFun­der Inc. re­ceived reg­u­la­tory re­lief from the On­tario Se­cu­ri­ties Com­mis­sion (OSC) to launch an ICO. To­kenFun­der is ex­empt from dealer regis­tra­tion re­quire­ments for now and can of­fer its ICO un­der the of­fer­ing mem­o­ran­dum prospec­tus ex­emp­tion.

“This is just the very be­gin­ning of what I be­lieve is a new world of dig­i­tal fi­nance,” says Alan Wun­sche, CEO and chief to­ken officer of To­kenFun­der.

An ICO — a.k.a. an ini­tial to­ken of­fer­ing — is sim­i­lar to an ini­tial pub­lic of­fer­ing (IPO) in that an ICO is a means by which a com­pany, typ­i­cally a tech­nol­ogy firm, can raise cap­i­tal. The dif­fer­ence, though, is that in­di­vid­u­als who put money into an ICO re­ceive a “coin” or “to­ken” rather than eq­uity in the com­pany in ex­change for his or her in­vest­ment. Th­ese coins are a form of crypto-cur­recy sim­i­lar to bit­coin. In­di­vid­u­als who in­vest in To­kenFun­der’s ICO, for ex­am­ple, will re­ceive the firm’s FNDR to­kens.

To­kenFun­der’s goal for the ICO is to raise $10 mil­lion, with which it plans to build a “smart to­ken as­set-man­age­ment plat­form.” This plat­form will help other star­tups launch their own ICOs in a man­ner that’s com­pli­ant with OSC reg­u­la­tions. For ex­am­ple, the plat­form will help star­tups with “know your client” and an­ti­money laun­der­ing re­quire­ments.

Once To­kenFun­der’s plat­form is up and run­ning, FNDR to­ken hold­ers can ex­pect to re­ceive dis­tri­bu­tions from op­er­at­ing prof­its, which will come from fees col­lected from com­pa­nies that choose to use the To­kenFun­der plat­form.

“[A To­kenFun­der dis­tri­bu­tion] is like a div­i­dend,” says Wun­sche. “[But] it’s not eq­uity; it’s a new kind of fi­nan­cial in­stru­ment.”

To­kenFun­der will have reg­u­la­tory re­lief for a year, after which the com­pany will be re­quired to ap­ply for dealer regis­tra­tion.

The OSC ap­proved re­lief to To­kenFun­der through the Cana­dian Se­cu­ri­ties Ad­min­is­tra­tor’s (CSA) “reg­u­la­tory sand­box.” Prior to the OSC’s ap­proval, To­kenFun­der had worked with the OSC LaunchPad, an ini­tia­tive meant to help star­tups and reg­u­la­tors un­der­stand how new busi­nesses can fit into to­day’s reg­u­la­tory en­vi­ron­ment. (See story at right.)

To­kenFun­der’s I CO is the sec­ond ICO to re­ceive reg­u­la­tory ap­proval in Canada. The first was Mon­treal-based im­pak Fi­nance Inc., which re­ceived ap­proval for its im­pak coin from the Au­torité des marchés fi­nanciers in Au­gust. In­di­vid­u­als who in­vest in im­pak Fi­nance re­ceive MPK coins that can be used to pur­chase goods and ser­vices from ven­dors that qual­ify for im­pak Fi­nance’s im­pact econ­omy ecosys­tem.

“The im­pak phi­los­o­phy is that we want to en­cour­age busi­nesses to com­ply with the ‘three Ps,’ or a triple bot­tom line: peo­ple, planet, prof­its,” say Kosta Kos­tic, a part­ner with McMil­lan LLP in Mon­treal and co-founder of im­pak.

Tak­ing a dif­fer­ent tack, Water­loo, Ont.-based Kik In­ter­ac­tive Inc. de­cided to ex­clude Cana­di­ans from its re­cent ICO be­cause of “weak guid­ance from the [OSC],” ac­cord­ing to blog post re­leased in Septem­ber by Ted Liv­ingston, Kik’s CEO and founder.

Where and how th­ese types of fundrais­ing ini­tia­tives fit within se­cu­ri­ties law still is un­clear.

“We’re get­ting lots of calls on this,” says Al­lan Good­man, part­ner with Toron­to­based law firm Good­mans LLP. “But we can’t say, ‘Look at page 66 of the act.’ [The sit­u­a­tion] still is very grey, and we’re still wait­ing for pro­nounce­ments from the reg­u­la­tors.”

The ques­tion is whether a com­pany’s coin is a se­cu­rity (it meets the cri­te­ria of an in­vest­ment con­tract, such as an ex­pec­ta­tion of profit from the ef­forts of oth­ers) or a util­ity (the coin’s func­tion is closer to some­thing like a re­ward points pro­gram that can be used in a closed sys­tem, such as the is­su­ing com­pany’s plat­form).

In re­cent months, global reg­u­la­tors have is­sued no­tices that they’re watch­ing this de­vel­op­ment and to give some in­di­ca­tion about their view on ICO prod­ucts. Ear­lier this year, state­ments from reg­u­la­tors such as the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion (SEC) and the U.K.’s Fi­nan­cial Con­duct Au­thor­ity in­di­cated that th­ese coins may fall un­der se­cu­ri­ties law. The SEC also has is­sued warn­ings of the po­ten­tial for fraud through th­ese new of­fer­ings. China has banned ICOs out­right.

Ac­cord­ing to a CSA no­tice pub­lished in Au­gust: “In many cases, when the to­tal­ity of the of­fer­ing or ar­range­ment is con­sid­ered, the coins/to­kens should prop­erly be con­sid­ered se­cu­ri­ties.”

The OSC, for its part, en­cour­ages com­pa­nies to talk with the OSC LaunchPad team about po­ten­tial ICOs.

“The last thing we want is a firm [that] doesn’t even re­al­ize they’re in a reg­u­lated space,” says Pat Chaukos, chief of the OSC LaunchPad, who adds that the OSC has had its eye on ICOs for some time. She be­lieves that such cryp­tocur­rency of­fer­ings “have the po­ten­tial to change how fi­nan­cial ser­vices are of­fered to Cana­di­ans.”

For ex­am­ple, “blockchain” tech­nol­ogy (which links re­lated dig­i­tal records to­gether) could im­prove the ef­fi­ciency of se­cu­ri­ties-re­lated func­tions such as clear­ing and set­tle­ment, trad­ing and pay­ments. As well, ICOs are a new area of po­ten­tial in­vest­ment for in­di­vid­u­als and funds that would in­vest in th­ese com­pa­nies.

Fur­ther­more, tra­di­tional fi­nan­cial ser­vices firms may have to de­cide whether they will stick to of­fer­ing con­ven­tional IPOs or also of­fer ICOs, the lat­ter of which have lower fees.

Says Ea­monn Maguire, global and U.S. leader for New York­based KPMG LLP’s dig­i­tal ledger ser­vices: “The ques­tion for some of the con­ven­tional play­ers in the sec­tor be­comes: ‘Am I hav­ing a Ko­dak mo­ment?’ In the neg­a­tive sense, as op­posed to the pos­i­tive sense.”

“It’s not eq­uity; it’s a new kind of fi­nan­cial in­stru­ment”

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