TokenGX Inc. proposes to create a novel blockchain-based platform for the trading of security tokens to facilitate capital raising for issuers and provide liquidity for investors. Such tokens represent equity or debt interests which will be held in digital wallets.
In a decision issued on 22 October 2019, the Ontario Securities Commission (OSC) agreed to provide certain time-limited relief from applicable securities law requirements to allow TokenGX to pilot test its proposed business model in a sandbox testing environment with sellers and purchasers resident in Ontario. Subject to certain conditions, the OSC is allowing TokenGX to operate a trading platform that acts as a secondary market for the tokens of its affiliate, Token Funder Inc., that were distributed by way of an offering pursuant to the offering memorandum prospectus exemption in section 2.9 of National Instrument 45-106 - Prospectus Exemptions, and for tokens of up to ten Ontario issuers that are distributed under prospectus exemptions through the primary distribution platform developed by Token Funder Inc.
Subject to fulfilling certain know-your-client requirements and investment limits, both retail and accredited investors, pre-approved by TokenGX, will be eligible to trade tokens over the TokenGX platform. Token trades will occur directly between participants without the involvement of custodians or clearing agencies, but TokenGX will not facilitate trading of tokens created on other platforms or that can be traded outside of its platform. The decision expires on the earlier of 12 months after the closing of the first completed initial token offering of an issuer on the primary distribution platform developed by Token Funder Inc. and 16 April 2021.
Among other things, TokenGX must establish and maintain a page on its platform for each issuer which will contain ongoing business disclosure including corporate information, token issuance details, an offering memorandum of the issuer, quarterly financial and management reports, annual financial statements and notice of any material changes in the business, operations or capital of the issuer. The OSC’s decision further mandates that investors be provided with a contractual right of action for damages against the issuer of tokens and certain other interested persons where the disclosure posted on the TokenGX platform contains a misrepresentation, subject to certain defences available under Ontario securities laws. The officers, directors and employees of the issuers of tokens will not be permitted to trade over the TokenGX platform.
While the OSC stresses that this time-limited pilot testing relief is fact-specific and should not be viewed as a precedent for other filers, it is an exciting development for the Canadian fintech community and it will be interesting to see what other innovations the OSC LaunchPad will support.