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The Ontario Securities Commission’s decision to approve the token offering opens doors for ther entrepreneurs to raise capital through their own coin sales.

Fred Lum/The Globe and Mail

The Ontario Securities Commission has, for the first time ever, given the green light to an "initial token offering," as regulators around the world grapple with the emerging online fundraising method.

The regulator's decision means Toronto-based TokenFunder will be permitted to sell digital tokens to retail investors in order to fund the creation of its platform, which will allow other entrepreneurs to raise capital through their own coin sales.

Token offerings, sometimes referred to as initial coin offerings or ICOs, have been rapidly gaining popularity. The fundraising method, which is similar to crowdfunding, has allowed some early-stage companies to raise millions of dollars in minutes by selling a digital token or coin that typically promises to provide access to a platform that they intend to build.

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To date, the vast majority of token offerings have been unregulated, occurring in the digital sphere, where investors buy in using cryptocurrencies such as bitcoin.

Some have cautioned that the sector is ripe with fraud, leaving regulators scrambling to strike the right balance between encouraging innovation and protecting investors.

In August, the Canadian Securities Administrators issued its policy on token offerings, noting that it will decide on a case-by-case basis whether a particular coin offering constitutes a security and should be subject to investor protection laws. But although the policy serves notice to companies that their planned token or coin offering may fall within the realm of Canadian securities regulators, the CSA also emphasized its desire to encourage innovation. The organization is striving to fulfill that mandate through what it calls its "regulatory sandbox," which allows firms to be exempted from certain regulatory requirements in order to allow them to experiment with unconventional business models and products.

TokenFunder used the regulatory sandbox to receive a 12-month exemption from the requirement to register as a securities dealer. The time-limited exemption allows the company to test-drive its business model before figuring out its next steps.

Alan Wunsche, the company's chief executive, says many of the firms raising large amounts of money through ICOs don't verify their investors' identities and therefore don't know where the cash is coming from.

"We believe there's a safe way for this investment vehicle to develop," Mr. Wunsche said.

"We believe we can provide investor protections as well as innovate with the cryptocurrencies of tokens."

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Despite the CSA's efforts, some advocates of blockchain – the digital ledger that underpins bitcoin and other cryptocurrency transactions – have opposed Canada's regulatory approach. The Blockchain Association of Canada argued in a letter to the country's finance ministers that the policy is not clear enough and will push Canadian innovators to other jurisdictions. Kik Interactive Inc., a Waterloo, Ont.-based tech startup, chose to exclude Canadian residents from its recent token sale, which raised nearly $100-million (U.S.).

Others have opted to go the regulated route. While TokenFunder is Ontario's first regulated token offering, Quebec-based Impak Finance is touted as Canada's first legal ICO. The Impak Coin sale raked in roughly $1.4-million (Canadian) to fund the creation of a platform for investing in socially responsible enterprises.

TokenFunder will launch its token sale on Nov. 1, at which point retail investors will be able to register to begin the investment process. Unlike some ICOs, which give token holders no rights, this one will allow its investors to share in the platform's future success, much like shareholders in a public company.

"It is a myth that regulation is in the way," TokenFunder co-founder Laura Pratt said in a statement. "It's the right way."

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