On July 24, 2019, the Ontario Securities Commission (OSC) approved a settlement agreement with CoinLaunch Corp., a Toronto-based crypto consulting firm that offers consulting, marketing and promotional services to companies seeking to launch initial coin offerings (ICO). The OSC pursued enforcement actions against CoinLaunch for engaging in, and holding itself out as engaging in, the business of trading securities without being registered to do so. Under the settlement agreement, CoinLaunch was required to pay an administrative penalty of CA$30,000, disgorge profits of CA$12,233.06, and an additional CA$10,000 in costs. CoinLaunch is also prohibited from trading in or acquiring any securities or derivatives for five years.
The CoinLaunch enforcement action is notable because CoinLaunch did not act as buyer, seller or issuer of the tokens sold during the ICO that it consulted on; instead, CoinLaunch provided certain consulting, marketing and promotional services to the issuers in order to facilitate the ICO (Services). The OSC determined that the provision of the Services, constituted an act in furtherance of the sale of those tokens. Under the Securities Act (Ontario), an act in furtherance of a sale of a security may fall under the definition of a trade or an act in furtherance of a trade. Trading securities, or acting in furtherance of a trade of securities, triggers registration requirements.
The OSC determined that the following Services, considered together, constituted an act in furtherance of a sale:
- Creating and deploying tokens to Ethereum addresses associated with the token issuers;
- Creating and preparing promotional materials termed “white papers” for the token offerings;
- Creating and managing live websites, or “landing pages”, to promote the token offerings;
- Providing advice to the token issuers with respect to the structure of the token offerings;
- Booking a booth for an agent of the token issuer to market the token offering at an event;
- Introducing the token issuers to crypto-asset trading platforms to “list” the tokens for public trading; and
- Introducing the token issuers to an online forum, which announced the launch of the two security tokens and provided other marketing materials resembling those included on the landing pages.
The CoinLaunch settlement sends a message to all players in the cryptocurrency industry to carefully consider the possible application of securities laws to activities beyond simply buying, selling or issuing security tokens. The provision of consulting, marketing or promotional services in support of an ICO may subject a company to securities regulation and regulatory investigation.
A special thank you to Noah Walters (summer student) for his assistance with this article.
- CoinLaunch Corp. (Re), 2019 ONSEC 26 (2019) online: https://www.canlii.org/en/on/onsec/doc/2019/2019onsec26/2019onsec26.html?autocompleteStr=(re)%202019%20onsec%2026&autocompletePos=1 at para 21.↩
- Ibid. at para 12. ↩