Canadian securities regulators issue guidance on disclosure by crypto assets issuers

The Canadian securities regulators have published guidance on continuous disclosure obligations for reporting issuers dealing in digital assets, including cryptocurrencies, tokens, stablecoins, and other digital assets relying on blockchain technology (crypto assets). 

Key recommendations 

Safeguarding of Crypto Assets

Issuers are expected to identify controls adopted (or not adopted) to protect against the risk of theft or loss of crypto assets. Appropriate controls may vary depending on the size of the issuer, the type and quantity of crypto assets held, and the frequency at which the crypto assets are moved. Issuers that have retained a third-party custodian should disclose sufficient information on that custodian. Issuers that have not retained a third-party custodian should disclose their reasons for not doing so. The staff notice lists several examples of the information the Canadian securities regulators (CSA) would expect to see in this regard.

Use of Crypto Asset Trading Platforms

Issuers that hold crypto assets through a crypto asset trading platform without holding a private key or control over the assets are subject to the solvency, integrity and proficiency of the platform’s operators. Accordingly, such issuers are expected to disclose the extent to which they rely on crypto asset trading platforms, and the controls adopted to protect against theft or loss.

Description of Business

In complying with the requirement to describe their businesses, issuers are expected to all include material information, which would likely include the nature of their operations, how they intend to generate revenue, their specialized skill and knowledge, the competitive conditions they face, the sources, pricing, and availability of equipment they use and any reliance on third-party service providers. 

Risk Factors

In complying with the requirement to disclose relevant risk factors, issuers are expected to be specific and sufficiently tailor risks that relate to the issuer and its business. Such risk factors may include availability and/or cost of electricity, potential declines in crypto asset prices, decreased rewards for mining, and access to crypto assets held by third parties.

Promotional Activities

Issuers are cautioned against providing unbalanced or unsubstantiated material claims about their businesses and corresponding opportunities for profit. Promotional statements should be supported by objective data that provides a reasonable basis on which the conclusion is based. For more information on promotional activities generally, issuers are referred to CSA Staff Notice 51-356 Problematic Promotional Activities by Issuers available here.

Material Changes

As is always the case, issuers are required to disclose events that would reasonably be expected to have a significant effect on the market price or value of the issuer's securities. Such events for crypto asset reporting issuers may include entering into a custodial agreement with a third party, changing custodians, the loss or theft of crypto assets, an acquisition or sale of mining equipment, or entering into a mining pool arrangement or an electricity supply arrangement, if such arrangement is significant in relation to current operations.

Issuers Whose Business is Investing in Crypto Assets

Even if issuers do not technically constitute an “investment fund” as defined under National Instrument 81 106 Investment Fund Continuous Disclosure, investor protection requirements applicable to investment funds may apply if investing in crypto assets is a material aspect of the issuer's business and the issuer does not have other substantial operations. If such an issuer were to file a prospectus absent appropriate investor protections, regulators may not issue a receipt if determined to be contrary to the public interest. Issuers are referred to CSA Multilateral Staff Notice 51-349 Report on the Review of Investment Entities and Guide for Disclosure Improvements, available here, for additional guidance on the nature of disclosure expected of investment entities. 

Financial Statements and Auditing Issues

There are particular accounting policy and control considerations of relevance to issuers involved in cryptocurrencies, as a subset of crypto assets. The CSA has included in its guidance expectations related to recording cryptocurrencies at fair value, accounting for cryptocurrency mining and the equipment involved, and settling non-monetary transactions in cryptocurrency.  Issuers are reminded to include the specific disclosures required under IFRS, and to review guidance published by the Chartered Professional Accountants of Canada and communications from the Canadian Public Accountability Board.

Conclusion

The emerging nature of crypto assets and the novel risks associated with them can create challenges for issuers seeking to comply with existing disclosure obligations. The CSA guidance provides clarity for issuers dealing in crypto assets, serving as a useful guide to assist issuers and their advisors in adequately preparing disclosure.

CSA Staff Notice 51 363 Observations on Disclosure by Crypto Assets Reporting Issuers is available here. 

The authors wish to thank James Farrell, articling student, for his help in preparing this legal update