This is the second entry in our series of blogs examining Canada’s cryptocurrencies’ regulatory and business landscape. Last week, we wrote about the status of crypto trading platforms in Canada and the tighter requirements imposed for Ontario businesses offering Ontario residents access to crypto trading by the Ontario Securities Commission (OSC). Our latest post will review the recent guidance issued by Canadian Regulators outlining the regulatory requirements and parameters for acceptable marketing practices for businesses that operate crypto trading platforms.
In September of 2021, the Investment Industry Organization of Canada and the Canadian Securities Administrators (CSA) issued Staff Notice 21-330 – Guidance for Crypto-Trading Platforms: Requirements relating to Advertising, Marketing and Social Media Use.
The CTP Marketing Notice is meant to guide Crypto Trading Platforms, dubbed CTPs by Canadian regulators, on how existing requirements under securities legislation and Investment Industry Organization of Canada rules relating to advertising, marketing and the use of social media may apply to these businesses.
As we wrote about last week, Canadian regulators consider any entity “that facilitates or proposes to facilitate the trading of crypto assets that are securities (“Security Tokens”) or instruments of contracts involving crypto-assets (“Crypto Contracts”).”
The CSA has previously released guidance on what it considers to be the material differences between Security Tokens and Crypto Contracts. You can access the advice here.
Generally, Security Tokens would have the rights associated with common shares, such as voting rights or receiving dividends. These fall directly within the definition of a security and are immediately subject to securities legislation and the various securities acts across Canada.
As a side note, since Canada still does not have a national securities regulator, each province and territory has its own version of a Securities Act. The CSA issue notices based on the various provincial regulators’ consensus and aims to foster co-operation across Canada. However, as we wrote about in our previous post, various provinces can take action on their own — the OSC requiring Ontario CTPs to initiate immediate regulatory contact is an example of a provincial regulator acting on its own strategic goals.
In contrast with Security Tokens, Crypto Contracts are not always subject to securities regulation. However, Canadian regulators have found that most crypto trading platforms do not immediately entitle a buyer/seller to a crypto asset. Generally, transactions on a crypto-trading platform involve a contract or instrument to purchase, sell, or deliver an underlying crypto asset. The CSA has taken the view that where the contract for the purchase or sale of the underlying crypto asset does not result in an obligation to make immediate delivery of the underlying crypto asset, and/or immediate settlement of the purchase/sale transaction.
One of the key distinguishing features of a Marketplace Platform is connecting multiple buyers and sellers.
One of the key distinguishing features of a Dealer Platform is that it does not connect buyers and sellers, but rather is the counterpart for every trade. So, on a Dealer Platform, any trade you place is with the CTP itself and your orders never interact with another trader’s orders.
The CTP Marketing Notice reminds operators of CTPs and entities pursuing CTP registration that existing securities legislation places limits on what are acceptable marketing practices, in particular, CTPs should consider the following:
- Whether a CTP is making statements in advertising and marketing materials that could be considered false or misleading
- concerns over the use of gambling-style contests, promotions or schemes, such as the offering of bonuses or rewards based on the level of trading that may encourage excessive trading by retail investors
- compliance and supervisory challenges when using social media to promote CTPs, and
- complying with securities legislation generally
In the CTP Marketing Notice, the CSA confirms that there are numerous provisions in securities law and IIROC trading rules that apply to CTPs and that prohibit false or misleading statements in advertising or marketing materials.
In the notice, the CSA provides the following examples of statements or materials that would be considered improper:
- statements that suggest that a CTP is registered under securities legislation where this is not the case;
- statements that suggest that a securities regulatory authority or regulator has approved or endorsed the CTP, any products offered on the CTP or any disclosure or other representation made by the CTP; or
- about any matter that a reasonable investor would consider relevant or important in deciding whether to enter into or maintain trading or advising relationship with the CTP if the statement is untrue or omits information necessary to prevent the statement from being false or misleading in the circumstances in which it is made.
In its notice, the CSA provides a specific warning against gambling-style advertising and marketing. The CSA includes under that general heading any advertising or marketing strategies that include contests, promotions, bonuses and time limits to encourage investors to engage in trading and to act quickly for fear of missing out on an investment opportunity or a reward.
As an example of inappropriate marketing, the CSA points to a promotion that involves a bonus scheme offering a financial reward or a bonus interest in a particular type of crypto asset for the first 500 investors who take action within the next 24 hours.
The CSA states that it is concerned that some of these strategies may inappropriately encourage investors to engage in excessively risky trading, taking on risks that they would normally avoid.
As entities regulated under securities legislation and subject to IIROC trading and member rules, CTPs need to be aware that they are obligated to keep detailed records of their business activities, financial affairs and client transactions. This includes tracking all the methods they use for communicating with clients and the general public for business purposes. Therefore, CTPs are obligated to keep detailed social media activity records and create and maintain a system or process for legislation-compliant record retentions with extensive retrieval capabilities.
There are currently six CTPs that are registered in Ontario. A list of current registrants can be found here. These include CoinBerry, Netcoins, and Wealthsimple. All the CTPs currently registered are Dealer Platforms, and to date, no Marketplace Crypto Trading Platforms have yet obtained registration in Ontario.
The business law team at Bader Law has decades of experience in establishing new legal identities for businesses throughout Mississauga and the Greater Toronto Area, be it as a private corporation, a limited liability partnership, a sole proprietorship, or a corporation needing to make a private placement of securities. Contact us online or at (289) 652-9092.