The Ontario Securities Commission (“OSC“) has entered into a settlement agreement with a Canadian company called CoinLaunch to settle claims that it engaged in the business of trading securities contrary to the Securities Act (Ontario) in respect of two ICOs. Articles about CoinLaunch stated that over $1,050,000,000 was generated on its ICO platforms (see below).
The two ICOs that were part of the settlement were BCZero and ECoreal. BCZero was an ICO issued for a truck racing team in the Czech Republic. ECoreal was an ICO issued to develop a resort in Portugal.
CoinLaunch offered ICO consulting services that included writing white papers, soliciting investments, going on fund raising roadshows, getting listed on digital currency exchanges and fulfilling anti-money laundering law requirements. CoinLaunch was not registered to be in the business of trading of securities and was not exempt from registration.
The parties agreed that the Howey Test applied to the two ICOs under Ontario law, which may be the most important take-away from the settlement agreement for future actions by the OSC.
Pursuant to the settlement agreement, CoinLaunch agreed to pay a fine of $30,000 plus costs, to disgorge $12,000 and to destroy access to ICO coins in its possession. It is prohibited from trading in securities for 5 years and its CEO, Reuven Cohen, agreed not to act for any company engaged in the business of trading in securities where such company is not authorized to do so.
The OSC took into account an argument by CoinLaunch that it was unfamiliar with the law as a mitigating factor. Every legal and natural person in Canada is deemed to know the law of Canada and it is not a defence to argue lack of knowledge of the law in the criminal, civil or regulatory context. Recognizing that, the OSC noted that such arguments by ICO players in the future may be given little weight.
The settlement agreement also puts ICO players on notice generally and the OSC warned that firms that ignore the Securities Act can expect to face worse consequences.
CoinLaunch did not shy away from describing itself as in the business of promoting, offering, selling and listing securities – on this site, it described itself as a platform to create and sell ICOs “safely and securely” with know-how to walk any company through the sale of ICOs from pre-sale, sale to the public and on the secondary markets.
And here, its CEO describes how one could use the platform and services to avoid, among others, lawyers, which were, he stated, “expensive.” CoinLaunch was described as a company that “specializes in …legal.” That seems suggestive of the practice of law and to the extent it is, no one associated with CoinLaunch appears to have been licensed under the Law Society Act to provide legal services, or hold themselves out as authorized to offer legal services.
According to a representation made in an interview with Tech Crunch, over $1 billion was generated using CoinLaunch. CoinLaunch launched another service called Fraction/al, which separate and apart from its CoinLaunch service and funds raised on that platform, “helped raise over $50 million for clients” in a two month period in the summer of 2018.
The settlement agreement does not address what happened to the $1,050,000,000 or how members of the public that used their platforms and who made payments of $1,050,000,000, as alleged, can claim the right of rescission in respect of the sale of securities sold contrary to the Securities Act. CoinLaunch claimed it had users from over 60 countries on its platform. It is also possible that the figures were greatly exaggerated or untrue, and were made to drive sales as mere legal puffery, and that no members of the public actually paid those sums.