Oziel Law Blog

How Governments Are Reacting to ICOs

by Dunny Medina on December 3, 2017 No comments

This article originally appeared on Coindesk.

There are certain seismic disruptions to the natural order that force governments around the world to pay attention and react quicker than the tools of governance ordinarily allow.

Epidemics, terrorism, nuclear energy, world war and now…blockchain technology. Specifically, initial coin offerings (ICOs) are making governments itchy.

If you are trying to keep up, you will be very busy and very confused. Each week seems to bring another pronouncement from yet another country. Big or small, everyone has something to say. We’ve heard from behind the veiled curtain of mega-states like Russia and China, and we’ve heard from the neighborly nations like Canada and the Isle of Man.

The message is far from clear. While many nations can stand united on challenges like melting ice caps, they’re a bit more baffled with crypto.

Click here to read the full article on Coindesk.

Featured Image used via Shutterstock

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Dunny MedinaHow Governments Are Reacting to ICOs

OSC Approves Initial Coin Offering

by Dunny Medina on October 30, 2017 No comments

When it comes to blockchain, the Canadian securities regulators aren’t sticking their heads in the sand. Except, that is, when playing in their sandbox.

The Ontario Securities Commission (OSC) created its sandbox, called LaunchPad, to encourage fintech companies to come to the OSC early with their innovations rather than build them in the shadows.  The sandbox is about dealing with grey areas, which seems to be the de facto zip code of many startups these days.

And when it comes to grey zones, there’s at least 50 shades when dealing with blockchain.

So, in the hope of technicolour progress – and a little less grey in our lives – we welcome the latest OSC sandbox decision.  On October 17, 2017, the OSC provided a blueprint for Token Funder Inc. on how to undertake its initial coin offering (ICO). It’s the first regulatory decision relating to an ICO to come out in Ontario. Let’s take a look at it.

Background about Token Funder:

Token Funder, an Ontario company headquartered in Toronto, wants to build a platform to:

  • facilitate ICOs for third-party issuers (so, an online crowdfunding platform for token offerings);
  • provide token and coin management and governance services for these token issuers (so, they’re anticipating that there will eventually be regulations governing how issuers must conduct ICOs and manage their investors, which means token issuers will need platforms like Token Funder to help support them); and
  • provide for certain transferability of tokens and coins (so, a “token exchange-lite” that will address securities law requirements, such as transfer restrictions on private placement securities).

Token Funder also wants to create 1 billion of its own digital tokens through a smart contract on the Ethereum Blockchain (“FNDR Tokens”).  Of the 1 billion FNDR Tokens, 200 million FNDR Tokens will be sold under Token Funder’s ICO for $10 million gross proceeds (in order to fund the build-out of if its platform), 100 million FNDR Tokens will be held back by Token Funder as payment currency for advisors and service providers, and the remaining 700 million FNDR Tokens will be held back by Token Funder for future financings.

The OSC’s Decision on Token Funder:

Token Funder came to the OSC under the Launchpad sandbox to present and analyze its business model. What resulted is the OSC’s Decision, a blueprint as to how Token Funder should structure and run its ICO, plus some foreshadowing of additional regulation to come.

Here’s how Token Funder will run its $10 million ICO:

  • Treat this offering like a private placement. Token Funder must run its ICO like a private placement of securities, which means ensuring that a prospectus exemption is available. In this case, Token Funder intends to use the offering memorandum exemption, which involves a very detailed ‘white paper’ that must follow a required statutory form. Token Funder will only be able to raise a maximum of $2,500 per investor under this exemption, unless an investor is verified as “accredited”. The investment is to be made through a digital smart contract established by Token Funder using the Ethereum Blockchain, and the investor can subscribe by the payment of Ether or Canadian dollars.
  • Verification of investors. Token Funder must conduct a know-your-client and suitability review for each investor in the ICO.  This means a thorough onboarding, information collection and verification process, including conducting a survey to ensure that the investor has a detailed understanding of how blockchain-based tokens or coins works.
  • Reporting to investors. After closing of the ICO, the Management of Token Funder must provide holders of FNDR Tokens updates regarding the milestones for development of the platform, other material events concerning the business, and annual audited financial statements.
  • Limited voting rights. Holders of FNDR Tokens will not have any voting rights in respect of Token Funder’s governance or operational matters; however, holders of FNDR Tokens will have certain voting rights on the entities entitled to use the platform.
  • Additional registration requirements. Once the ICO is completed, Token Funder must use the proceeds to fund the build-out and launch of the platform AND concurrently seek to become some sort of “dealer registrant” under securities laws (think licensed banker, stock broker or crowdfunding portal).
  • No listing on an exchange (yet). The FNDR Tokens issued in the ICO 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.

Some Takeaways:

  • The Decision represents a first step to a fully-licensed ICO crowdfunding and exchange platform. The Decision and the completion of the ICO are just the first step. The next step – and the real challenge – is for the OSC and Token Funder to design the rules and requirements around building and running its platform (to facilitate other ICOs for companies and provide a type of token exchange).  As the Decision makes clear, in order to be a fully-regulated platform, Token Funder will have to become a “registrant” (someone who has a license to be in the business of trading or advising in securities). The OSC will likely need to provide Token Funder with further exemptive relief orders from the typical “registrant” requirements to bring such requirements into compatibility with a blockchain platform.
  • Is it a security or not? They don’t even bother going into the discussion. Coins or tokens in the Token Funder context are assumed to be securities.  You can call it whatever you want, but it’s still a security, so let’s move on!
  • Playing in the sandbox still means following the rules. Token Funder decided to undertake its ICO, and ultimately build its platform, under the watchful eye of the securities regulators. They’ve made their bed, and now they’ve got to comply with it. Compliance in this case means: 1) treating the ICO like a private placement of securities under existing prospectus exemptions (offering memorandum exemption for retail investors, and accredited investors for wealthier “angels” or “institutional”), 2) running know-your-client and related procedures, and 3) getting registered to be in the business of trading or advising in securities.
  • Liquidity of coins or tokens is still an issue to be resolved. It’s not clear yet if the OSC and Token Funder have determined how to deal with the secondary market (or transferability) of the tokens. If you treat the tokens as securities that are sold in the private market (i.e., not with a prospectus as a free trading security), then those tokens must be subject to private market resale restrictions. This means that Token Funder may have to design its platform or “token exchange” so as to facilitate secondary market trading that complies with securities laws. We will have to stay tuned to see how this plays out.
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Dunny MedinaOSC Approves Initial Coin Offering

Drafting and Negotiating eSports Player Contracts

by Allan Oziel on September 19, 2017 No comments

It may come as a surprise to some, but eSports is big business. eSportEarnings.com has recorded over USD$360 million in earnings over about 23,000 tournaments. The biggest stars in League of Legends have earnings over $800,000. However, eSports is not reserved for Multi-player Online Battle Arena games anymore. In 2018, the NBA will be releasing the NBA 2K eLeague. Existing basketball franchises have already committed to purchase and run eSports teams.

Much like traditional sports, eSports teams need to scout, recruit and retain the most talented players or athletes. As well, like traditional sports, teams, and players (or their agents) must negotiate well-drafted player contracts.

The following is a non-exhaustive list of provisions that should be negotiated in a player contract:

Player Responsibilities

The contract should set out that the player must attend and participate in all scheduled practices, meetings, games, tournaments, team promotional and commercial activities.

Compensation

How will the player be compensated? Is there a salary plus performance bonuses for placing in tournaments or the success of the team in the eSports league?

Will the team cover all travel and tournament-related expenses?

Player Conduct and Responsibilities

The contract should clearly state minimum conduct rules, which may reference (a) a player’s behavior, (b) what a player can wear during promotional events, tournaments, live streams, etc., (c) what gaming gear the player can use, (d) whether the player is required to participate in media appearances, social media, endorsements, etc., (e) how the player must conduct himself/herself at all times while employed by the team.

Player Assignment

Like professional sports, eSports teams should have the right to assign the player contract (trade the player) to other teams within the same eSports league.

Contract Guarantees

Will the team provide the player with a guaranteed contract? If so, then a clear term must be set out and a description of the payout on early termination should be described.

League Rules

It is important to note that some eSports leagues have their own set of rules that each team (and their players) must abide by. These rules should be taken into consideration when drafting/negotiating player contracts.

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Allan OzielDrafting and Negotiating eSports Player Contracts

Trademarks Abroad: The Madrid System and Canada

by Kristine on July 27, 2017 No comments

With growing access to foreign markets, it’s no surprise that more Canadian businesses are looking to protect their trademarks abroad. In 2014, adopting an international trademark registration system was a distant and abstract concept. Now, following a series of changes to Canadian trademark laws, the Madrid Protocol is closer than ever to being implemented.

With increased access to foreign trademark protection on the horizon for Canadian businesses, what is the Madrid Protocol and how will it affect your business?

An International One-Stop Shop

The concept of the Madrid Protocol is simple: a business from a member nation can file one application and pay one set of fees to protect and manage a trademark in one or more of the 98 member nations through a centralized system overseen by WIPO.

Take for example a business in the United States that wants to expand its reach into the Singaporean market. The business has two marks: one is registered and the other is in the early stages of the U.S. trademark application process. Both of these can be submitted through the U.S. trademark office to the World Intellectual Property Office (WIPO).

WIPO reviews, approves, and records both applications. The U.S. business receives a certificate of the international registration for both marks. From there, the Singaporean trademark office has 12-18 months to review and approve or reject the applications. If the mark is accepted in Singapore, it is the same as if it had been registered directly with the Singaporean office.

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KristineTrademarks Abroad: The Madrid System and Canada

Anonymous Defamation on WeChat (Full English Article)

by Allan Oziel on February 23, 2016 No comments

 

Earlier in December, I posted a link to an article I wrote for Chinese News Group which was translated into Chinese. The following is the full article in English.

….

According to Tencent, China’s biggest social network and online entertainment company, its flagship live chat, calling and social media application is used by over a billion people worldwide. In Canada, the app is particularly popular within Asian communities.

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Allan OzielAnonymous Defamation on WeChat (Full English Article)

Navigating Video Game Licensing

by Allan Oziel on February 23, 2016 No comments

Nerd Alert: I was into video games since as early as I can remember. I first remember playing early games long Pong, Breakout and Donkey Kong on the Atari 2600. I then remember when my dad got my brother and I the first generation Nintendo. We were lucky enough to have many games including all of the Mario Brothers games, Ice Hockey, Excite Bike, Zelda, Tetris, etc.

Through the years, my brothers and I ran through many consoles including the Sega Genesis, Playstation, Xbox, Xbox 360 and finally the Playstation 3. I also played video games on the computer! As my brothers and I got older, we were mostly into sports games but I also loved third person shooter games.

Despite loving games, I never thought I would have the opportunity to have my work intersect with the video game industry. Luckily, given my line of work, I have had the great fortune of being able to negotiate some very interesting video game licenses.

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Allan OzielNavigating Video Game Licensing

What Happens to Your Digital Assets When You Die

by Allan Oziel on January 19, 2016 No comments

Global TV interviewed me to discuss what happens to your digital assets when you die.

 

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Allan OzielWhat Happens to Your Digital Assets When You Die