As China moves to ban initial coin offerings (ICOs), a regulator on the other side of the world is taking the polar opposite approach.
Far from imposing penalties and refunds, Quebec's regulator for financial institutions, the Autorite des marches financiers (AMF), is seeking to better understand the blockchain use case – if not altogether encourage it. In fact, the AMF has not only determined that a token sale by Impak Finance, a platform for investing in socially responsible enterprises, is a security, it has gone so far as to accept the company into its regulatory sandbox.
With the news, Impak Coin becomes the first project to launch in the AMF's sandbox, announced earlier this year, and the first regulated ICO based in Canada.
Most notably, however, the AMF is also showing a willingness to bend certain rules for the sale, relieving Impak from several requirements securities issuers would normally be subjected to for investor protection purposes.
And according to Patrick Theoret, a director in AMF's corporate finance division, the regulator believes that's the best strategy for approaching new and novel tech.
He told CoinDesk:
"It’s in the spirit of the sandbox that we are willing to alleviate some of the requirements on, sort of, a test case basis. It's a test run to see whether there are investor protection [issues] with the relief that we grant."
Looking ahead, AMF will serve as the principal regulator to the token, and Canada's other provinces and territories will honor the decision via the Canadian securities passport system, which allows the startup access to all markets in the country while only complying with their principal regulator.
Announced earlier this year by the Canadian Securities Administration – a consortium of provincial securities regulators – the sandbox is meant to jumpstart fintech projects that don't easily fit within the confines of a legacy framework. And ICOs, a nascent fundraising mechanism by which new cryptocurrencies are created and sold to investors, fit this definition.
In this light, Paul Allard, president of Impak, said the decision to participate in the sandbox was straightforward.
"I had been working with the regulators for several years prior to Impak Coin, and I knew that they were keen in adapting their regulatory framework to catch up with the cryptocurrency sector," he said.
But the decision was also a necessity since AMF determined Impak Coin – which will be used to power Impak's platform – met its definition of a security. Specifically, it's a contract in which there is an investment in a common enterprise with the expectation of profit on the efforts of others.
Yet, as this ruling could come down on other ICO projects in the country in the future, AMF representatives said Impak Coin is serving as a de-facto test for a new kind of business onramp.
But while impactful for regulators, it's the relief granted to Impak that might be most notable for innovators and entrepreneurs.
Firstly, Impak will not have to register as a securities dealer, provided certain terms and conditions – such as know-your-customer screenings – are met, according to Sophie Jean, director of supervision of intermediaries at AMF.
Plus, because of its categorization as a security, the token distribution is supposed to come with a prospectus – a printed document describing a commercial enterprise in order to inform investors – but the AMF waived that requirement also, Jean said.
So far, Impak's token has been approved as a test case for a two-year window, after which, the stakeholders will reconvene and decide how best to proceed with Impak and future ICO projects.
Theoret emphasized that, in the absence of any investor complaints or problems, the agency would be willing to potentially extend the relief on a more permanent basis, stating:
"If nobody has made a complaint [asserting] that they weren’t protected enough in the sense of the securities and regulatory environment, then we’ll consider granting permanent relief to the filer. Or, if we have [multiple proposals] of a similar nature, then maybe we can consider permanent regulatory amendments so that our regulations are changed to permit this."
Learning by doing
AMF officials further emphasized that working through the regulatory sandbox approval process was critical because it enabled them to better understand a business model much different than what they're accustomed to seeing.
Jean explained that while it's a "traditional ICO" in the sense that there's a white paper and a new cryptocurrency, the regulator didn't have a past precedent for the filing.
"This was very, very novel because we had to apply the principles of regulation to the filer and provide the filer with a tailor-made order providing terms and conditions for the distribution of the digital currency," she said.
In this way, officials from AMF see their work with Impak as in line with guidance issued by CSA on August 24, which attempts to clarify the circumstances under which a token will be considered a security. Both developments, they said, send a signal about how Canada is responding to the potential promise of blockchain technology.
More crucially, though, they also help bridge two communities who some have sought to portray as at odds.
"A lot of these startups and blockchain-type companies might not have the level of sophistication in securities law to understand all these ramifications. It’s meant for everybody to take notice. Don’t forget about securities laws if you're endeavoring a project."
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