Testing the Substance of the “Tokenized Collectible Defence”

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by

Asad Akhtar
in , ,

On September 30, 2026, the Capital Markets Tribunal (the “Tribunal”) issued its decision in respect of an enforcement proceeding brought by the Ontario Securities Commission (“OSC”) in 2024 against a digital asset trading platform that offered fractionalized ownership in assets (“LMP”).

For businesses operating in the digital asset space, this decision may be of particular interest because this is the first time a capital markets tribunal has considered the guidance issued in CSA Staff Notice 46-308[1] in respect of tokenized assets. This guidance states a common enterprise may not be present for certain tokenized assets that have unique characteristics that “result in the purchaser exercising their personal preferences to value it as a mode of entertainment or as a collectible item [and where the] future market value of the token is primarily based on market forces and not on continuing development of a business”.

This decision also provides further clarity on the application of the investment contract analysis to an offering of tokens. Disappointingly, because the Tribunal concluded the tokens were “investment contracts”, it declined to consider the OSC’s alternative argument that the offering of tokens would also meet the definition of an “evidence of indebtedness”. This analysis would have been helpful for the ongoing discussions involving the regulatory perimeter of securities legislation over stablecoins. Additionally, while the OSC’s initial enforcement proceeding labelled the tokens as a “derivative”, this was also not considered by the Tribunal.

Background on the Decision

LMP facilitated the creation, sale and trading of tokens representing fractionalized ownership in real-world assets (e.g., trading cards and other high-value collectibles). LMP made several representations to purchasers regarding how the platform operated:

  • the tokens represented legal ownership in the collectibles and could be freely transferrable on the Ethereum blockchain;
  • physical collectibles would be held in secure third-party vaults; and
  • external auditors conducted quarterly vault audits and, in the event of an insolvency, auditors would be able to retrieve the items from the vault and distribute the proceeds to token holders.

LMP is perhaps best known for its association with a prominent YouTuber who publicly stated he was a co-founder and promoted the platform. This YouTuber famously used LMP in 2022 to fractionalize the ownership of an extremely rare and valuable Pokémon card (this card would eventually sell for approximately $16.5M USD). Notably, no public proceedings were brought against this YouTuber and the Tribunal’s decision is limited to LMP and its three managing principals.

In the published reasons, the Tribunal agreed with OSC staff that:

  1. the digital tokens offered on the platform met the definition of securities in Ontario by virtue of being “investment contracts”;
  2. LMP was in the business of trading securities without being registered, sold securities without filing a prospectus, and operated a marketplace in breach of Ontario securities law;
  3. the directors and officers of LMP were also responsible because they authorized or allowed LMP’s conduct;
  4. LMP and some of its key principals acted fraudulently by misrepresenting the core attributes of the tokens and the underlying collectible to investors (e.g., purchasers did not actually obtain direct legal co-ownership, tokens were not transferred on the blockchain to purchasers, assets were not protected from bankruptcy, etc.); and
  5. one of the principals breached Ontario securities law by misleading OSC staff about the compensation that he and other key principals received from LMP.

Key Takeaways:

  • Tokenized Assets, Including Those of Collectibles, May Trigger Securities Law Considerations – LMP unsuccessfully argued the tokens offered on the platform fell within the guidance issued in SN 46-308 in respect of tokenized assets that stated “[…] there may not be a common enterprise” for purposes of the investment contract test because the “value of the token may be based on its unique characteristics, and not on the efforts of others”.
  • Here, the Tribunal found that purchasers still had ongoing dependence on LMP’s managerial and technical efforts because it relied on LMP to: (1) mint and maintain the tokens on the blockchain; (2) build, maintain and promote the secondary trading platform; (3) orchestrate buyout and auction voting process; (4) handle asset authentication, appraisal, vault storage, and insurance; and (5) maintain ownership records on its backend ledger. 
  • The guidance in SN 46-308 should be narrowly construed and should not be viewed as a codified exemption for tokenized assets, even when the underlying assets are collectibles and the value of the tokens may be substantially based on market forces.
  •  In SN 46-308, CSA staff stated that “businesses should conduct a meaningful analysis based on the unique characteristics of their offering” and cautioned against performing a mechanical “tick the box” exercise.
  • Economic Realities of an Offering Are Determinative – While the Tribunal agreed with LMP that the legal tests need to be applied carefully, its analysis was informed on the economic reality of the offering – substance, not form, will be determinative. This approach has been consistently applied by the courts and tribunals in Canada and the U.S. in determining whether an offering involves an offering of an “investment contract”.
  • Here, the Tribunal found that LMP marketed the tokens as “value-appreciating, inflating hedging assets” which strongly suggested the predominant purpose for a purchaser acquiring the token was for investment purposes as opposed to personal possession or entertainment.
  • No Further Analysis on “evidence of indebtedness” and “derivative” – The Tribunal declined to consider OSC’s alternative argument as to whether the tokens would also be considered an “evidence of indebtedness” under Ontario securities law because it concluded the scheme was an investment contract.
  • The Tribunal declining to opine on OSC’s analysis will likely be disappointing for many practitioners in this space. As discussed in other articles, the CSA has been asserting broader jurisdiction over digital asset products (e.g., stablecoins) predominantly on the basis of these instruments being an “evidence of indebtedness” and/or “derivative”. 
  • While the facts present here are far from the ideal fact pattern, the Tribunal’s analysis would have been helpful in providing further clarity on when an offering of tokens will be considered evidence of indebtedness and how this may apply to offering of stablecoins that are not predominately acquired for “financial investment” purposes. 
  • No Double Sanctioning for D&O Liability – While two of the key principals were found liable under section 129.2 of the Securities Act (Ontario) (the “OSA”) for LMP’s registration, prospectus and marketplace breaches, the Tribunal declined to also deem these individuals liable for LMP’s fraud because it would constitute double-sanctioning where direct primary liability already exists.
  • Actual Knowledge Required for Acquiescence for D&O Liability – In dismissing one of the key principals from the director and officer liability allegations under section 129.2, the Tribunal rejected OSC’s position that an officer “ought to have known” about corporate non-compliance. Here, the Tribunal concluded that actual knowledge is a strict requirement for the finding of “acquiescence” under section 129.2 of the OSA. 
  • Legal Advice Defence – While it was not raised by the respondents, the Tribunal found that LMP simply seeking legal advice would not have been sufficient to trigger this defence. Rather, as established in Solar Income Fund,[2] the party advancing the defence must show that “the advice was sufficiently clear, specific and connected to the impugned act, by addressing the question raised by that impugned act”.
  • Admissibility of Compelled Testimony in a Strictly Regulatory Proceeding – The Tribunal held that the absolute bar against compelled testimony in section 18 of the Securities Act (Ontario) is limited to quasi-criminal prosecutions under section 122 of the Provincial Offences Act (Ontario) and does not apply to a strictly regulatory proceeding (i.e., an administrative enforcement proceeding is remedial).

[1] Securities Law Implications for Offering of Tokens (“SN 46-308”), available here: https://www.osc.ca/sites/default/files/pdfs/irps/csa_20180611_46-308_implications-for-offerings-of-tokens.pdf.

[2] Solar Income Fund Inc., (Re), 2023 ONCMT 3, available here: https://www.capitalmarketstribunal.ca/sites/default/files/2023-01/rad_20230111_solar-income-fund_reasons.pdf.