Recent Action Against Canadian Bitcoin Startup Highlights Need For Securities Compliance
On October 22, 2015, the Financial and Consumer Affairs Authority (FCAA) of Saskatchewan, Canada issued a decision that cleared Dominion Bitcoin Mining Company Ltd., a Canadian corporation, and its principals, of breaching applicable securities laws. In the decision, the FCAA describes certain screen captures taken from Dominion’s website which “leave room for little doubt that an offering of securities was being made.” Among the screen captures was a page entitled “corporate Structure” that stated that “When you purchase a share [of Dominion] you are purchasing assets from Dominion in [ten other Bitcoin-related entities that were 90% owned by Dominion],” a second page entitled “BitCoin Information” that stated that “By taking part in our offering, you own a share in one of the ten provincial companies that own Dominion. That share allows you an equal part in EVERY SINGLE BITCOIN WE EVER MINE,” and a third page entitled “How to Invest” that stated that “We are accepting investors from all ten provinces at this time."
In determining that a violation did not occur, the FCAA relied in significant part on the fact that some or all of the relevant website pages had been, and were intended to remain, password protected and encrypted. Along these lines, the FCAA noted in relevant part that “The formation of the company had been undertaken by experienced counsel and by the parties, and they were all fully aware of the securities laws with which they fully intended to comply. If part of the website was not effectively password protected and encrypted, it was unintended.”
Although this decision was rendered under applicable Canadian law, it provides important lessons for companies seeking to raise capital for Bitcoin-related businesses. Although Bitcoin may not itself be a security, at least for purposes of U.S. law (see Jeffrey E. Alberts and Bertrand Fry, Is Bitcoin a Security?, Boston University School of Law Journal of Science and Technology (Winter 2015)), when a Bitcoin-related company -- even a company focused on mining Bitcoin or holding Bitcoin, whose investors have only an indirect ownership interest in an underlying portfolio of Bitcoin -- offers and sells ownership interests in themselves, they may be considered to be making an offering of securities. Because this can expose them to civil, and possibly criminal, liability for violating securities laws, such companies should engage experienced counsel to make sure that they comply with all applicable regulations.
