What Does TokenFunder Do and Why is it Important?
TokenFunder is a Toronto start-up focused on helping companies “launch and manage ICOs.”1
There are plenty of examples of criticism of some recent ICOs, including Tezos, the third largest, which has been sued four times and accused of securities fraud.2 Tezos along with the many other less than legitimate ICOs have prompted many calls for regulation. The crypto-space moves very quickly so it is hard for regulators and investors to keep pace. This is the context in which TokenFunder emerged, as the first OSC-regulated ICO.
TokenFunder’s platform is built on the Ethereum blockchain, well-known for smart contracts – programs that enforce contractual terms using cryptographic code.3 For example, if a contract’s parties agreed that one of them would earn options, and that those options will vest according to a set schedule, a smart contract would execute that command.
Contract enforcement and disputes can be costly for many companies. This technology has the potential to massively reduce those legal and compliance costs.4 The platform also hopes to be able to reduce legal and compliance costs for issuers.
How TokenFunder’s Platform Benefits Issuers
TokenFunder’s platform is called the Smart Token Asset Management Platform (“STAMP”).5 STAMP empowers issuers to launch their ICOs in compliance with securities rules. It also provides governance and coin/token management services. Complying with these rules will require issuers to anticipate and pre-emptively solve problems rather than rushing to launch imperfect offerings as soon as possible.
The aim is to increase the frequency with which new coins and tokens achieve their original purposes. Since regulators and investors know the process has been designed with OSC involvement, TokenFunder could significantly increase confidence in the space amongst those key stakeholders. Here is a brief discussion of the nature of the OSC’s October regulatory decision.
To fund the establishment of the STAMP and its ongoing working capital needs, Tokenfunder will create 1,000,000,000 digital tokens through a smart contract on the Ethereum Blockchain (each a “FNDR Token”). TokenFunder will complete a private placement of FNDR Tokens by way of an “initial token offering” (the “Offering”) to fund the completion of the STAMP and to facilitate subsequent transfers of FNDR Tokens pursuant to available prospectus exemptions.
The Nature of the OSC’s Regulatory Decision
The OSC has granted TokenFunder one year of relief from securities rules. TokenFunder is benefiting from two specific exemptions:6
- An exemption from the dealer registration requirements. Where dealer registration is required, companies must meet investor protection obligations such as “know-your-client and suitability.”
- The ability to execute an offering using existing prospectus exemptions. A prospectus would cost issuers time and money and time, in particular, is in short supply in the fast-moving crypto sector
The dealer registration exemption is contingent on TokenFunder meeting obligations described in the decision, including:
- TokenFunder will conduct know-your-client and a suitability review for each investor and will determine for each investor who represents itself as either an eligible investor or an accredited investor, and who seeks to invest an amount exceeding CAD $2,500, whether the investor is an eligible investor or accredited investor, as the case may be;
- the FNDR Tokens issued in the Offering will not be listed and traded on any exchange, cryptocurrency exchange or organized market unless such listing and trading is done in accordance with applicable securities laws and approved in advance by the OSC;
- TokenFunder will establish, maintain and apply policies and procedures that establish a system of controls and supervision sufficient to manage the risks associated with its business in accordance with prudent business practices, including with respect to the Ethereum blockchain, cybersecurity and conflicts of interest between TokenFunder and its investors;
- TokenFunder must deal with its investors in good faith;
- TokenFunder must not provide its investors with investment advice or recommendations; and
- TokenFunder must abide by enhanced reporting requirements. It must inform the OSC of investor complaints within 10 days and file quarterly reports on average subscriber purchase amounts and regional subscriber details.
The OSC’s objective, in this decision, is to balance innovative new ideas with investor protection. To that end, they have created the Launch Pad.
The Launch Pad
The Canadian Securities Administrators (the CSA) has established a network of regulatory sandboxes in the provinces. The OSC’s sandbox is called Launch Pad.7 It is an acknowledgment that FinTech is evolving rapidly and, to keep pace, regulators must be open to experiments. This initiative will empower issuers to test their offerings on the Ontario market, in a time and scope-limited fashion.
What Does This Mean for Companies Raising Capital on the Blockchain?
They should acknowledge that the days of Ontario unregulated ICOs are ending. In a landscape in which some ICO issuers have faced heavy regulatory scrutiny, working with a knowledgeable securities lawyer is a great way to protect your business and investors. Beyond speaking to a securities lawyer to ensure compliance, ICO creators can work with the OSC through its LaunchPad initiative.
Should you have any questions on the above or wish to discuss a potential ICO, please contact Daniel D. Nauth at 416-477-6031 or email@example.com.