Lori Stein, Reba Nauth, Evan Thomas
Mar 15, 2021
On March 11, 2021, the staff of the Canadian Securities Administrators (CSA) released CSA Staff Notice 51-363 Observations on Disclosure by Crypto Assets Reporting Issuers (the Staff Notice). The Staff Notice provides guidance on the continuous disclosure obligations applicable to reporting issuers, other than investment funds, that are materially engaged in the business of mining and/or holding/trading of cryptocurrencies and other digital assets (crypto assets reporting issuers or crypto issuers). Crypto asset businesses considering an initial public offering or reverse take-over should carefully consider this new guidance, as should existing crypto issuers.
Crypto assets reporting issuers
CSA staff notes that there are currently 49 crypto assets reporting issuers in Canada. The British Columbia Securities Commission is the principal regulator to 31 crypto issuers and the Ontario Securities Commission is the principal regulator to 18 crypto issuers. Of these issuers, 27 are listed on the Canadian Securities Exchange, 18 are listed on the TSX Venture Exchange, two are on the TSX, one is on the NEO Exchange and one is not listed.
Most crypto issuers became reporting issuers via reverse take-overs or similar transactions that did not require a prospectus to be filed with the CSA.
- Custody: According to CSA staff, the controls adopted by crypto issuers to guard against the risk of loss are a material risk for investors, and crypto issuers can expect CSA staff to focus its reviews on disclosures of these controls. The Staff Notice provides prescriptive requirements for crypto issuers when disclosing their custody controls, including self-custody and third-party custody solutions, and to the extent applicable, reasons that an issuer has chosen not to use a third-party custodian.
- Trading platforms: The Staff Notice also states that the use of crypto asset trading platforms to hold and trade crypto assets is a material risk because, generally, the issuer does not hold the private key to, and does not have control over, the crypto assets held by the platform. CSA staff expects reporting issuers that hold assets on trading platforms to disclose the same information regarding the platform as it applies to a third-party custodian.
- Business description and risk factors: The Staff Notice also sets out the CSA’s expectations regarding topics that should be addressed in the business descriptions and risk factor disclosures of crypto issuers given the relative novelty of the crypto industry. CSA staff notes that risks of holding more established cryptocurrencies such as bitcoin or Ether may be significantly different from investments in other digital assets.
- Material change reports: The CSA identifies examples of scenarios that would, in its view, likely constitute a material change in the business of a crypto issuer, necessitating a press release and material change report, such as entering in a new custodial agreement, changing custodians, loss or theft of crypto, and changes to mining equipment, pool operations or electricity supply for miners. The Staff Notice indicates that some crypto issuers have failed to report such changes within the 10-day timeline for material change reports.
- Investment fund considerations: The Staff Notice states that issuers that have a material business of investing in crypto assets and do not have other substantial operations may be considered investment funds under securities laws. Such issuers could be required to take mitigation efforts to comply with the investment funds regime prior to obtaining a receipt for a prospectus from the CSA, including concentration restrictions, investment portfolio disclosure and the qualified custodian requirement.
- Accounting and audit: The CSA also provides guidance regarding the novel accounting issues raised by the cryptocurrency holdings of crypto issuers, which are the subject of evolving guidance from accounting standard setters and regulatory bodies. The Staff Notice summarizes how International Accounting Standards and International Financial Reporting Standards are currently being applied to cryptocurrency holdings and transactions and the unique audit challenges and potential solutions presented by crypto issuers and their activities.
Crypto issuers that are already reporting should expect their continuous disclosure to be reviewed by CSA staff. In addition, crypto asset businesses considering an initial public offering or reverse take-over should seek to address the CSA’s guidance when preparing their prospectus and/or listing statement.
Notably, the Staff Notice states “the failure to adopt adequate [custody] protections may give rise to public interest concerns about the issuer.” This suggests that CSA members may use their public interest powers to take enforcement action where crypto issuers appear to have inadequate custody controls with respect to crypto assets.
More generally, participants in the Canadian crypto asset industry, including trading platforms, custodians and investment fund managers, should be mindful of the CSA’s continued focus on the space and its goal of balancing investor protection with the promotion of financial innovation in Canada’s capital markets.