The British Columbia Securities Commission (BCSC) recently published a Notice and Request for Comment on a wide range of topics pertaining to the regulation of the burgeoning fintech industry.
Among the topics for which the BCSC seeks industry input is the issue of how securities regulation should interact with coin or token (ICO) offerings in order to provide investor protection while enabling efficient capital raising and preserving the intended functionality of the coins or tokens. The Notice gives two examples of fintech businesses that sought and obtained Exemptive Relief from securities law requirements. Both businesses received discretionary exemptions from dealer registration requirements for ICO offerings to be conducted in reliance upon statutory prospectus exemptions, and in one case, relief from the prospectus requirement to facilitate the token’s circulation as a form of currency within its defined ecosystem.
The Impak Finance Inc. (Impak) exemption order exempted Impak from the dealer registration requirement for the issuance of coins to raise funds for the development of a blockchain technology-based ecosystem intended to allow coin holders to use the coins to pay for goods and services from participating merchants. Prospective purchasers of the coins would receive an offering memorandum, and there were defined parameters for the development and functioning of the proposed ecosystem within which the coins would function. Impak also received an exemption from the “first trade” prospectus requirement for the initial use by purchasers of the coins in the ecosystem, provided that coins were transferred only to merchants participating in the ecosystem and not to secondary purchasers.
Token Funder Inc. (Token Funder) obtained a discretionary order exempting it from the dealer registration requirement in relation to the proposed issuance of tokens to raise funds for the development of a platform to facilitate third party capital raising through blockchain technology. The exemption runs for 12 months and requires Token Funder to become a registrant before launching the platform. The Token Funder exemption order also addressed the issue of accepting payment from investors in the offering using cryptocurrencies, know your client and suitability procedures, increased reporting to the regulator, and mechanics of how the smart contract for purchasing the tokens would operate.
These two decisions are detailed and specific, enabling two innovative fintech businesses the short term regulatory relief necessary to operate while at the same time addressing the issue of investor protection. As the fintech industry evolves and proliferates, the use of discretionary orders to address securities regulatory requirement in the context of ICOs is bound to become cumbersome, expensive and time-consuming. The goal should be to formulate a comprehensive, long term “one size fits all” approach to the regulation of ICOs and the fintech industry in general that is both flexible and fluid, and based on a deep understanding of the industry.
Securities regulation across multiple jurisdictions in an emerging industry will be challenging regardless of the approach – but business and commerce is likely to move strongly to tokenization across a variety of platforms in the next five years, and these new businesses will need to be able to function within a securities regulatory regime that is both efficient and consistent with investor protection objectives. It is hoped that the responses to the BCSC Notice will represent a first step in that direction.