In Autorité des marchés financiers c. GO Great Offers Direct Ltd., 2021 QCTMF 57, the Financial Markets Administrative Tribunal (TMF or Tribunal) imposed administrative penalties of $50,000 on each of Martin LeBlanc (LeBlanc) and Johnny Martin (Martin) and issued cease trade order against them, Nuvoo Inc. (Nuvoo) and G.O. Great Offers Direct Ltd. (Great Offers), including a prohibition to solicit investors. While the TMF had previously issued cease trade orders related to cryptocurrency (see e.g. our discussions of the PlexCoin saga available here as well as here), we believe that this is the first time that the TMF imposed administrative penalties on individuals for their participation in the distribution and sale of cryptocurrency investment contracts without being registered as dealers with the Autorité des Marchés Financiers (AMF), Quebec’s securities regulator.
This case involved two corporations, Great Offers, incorporated in Cyprus, and Nuvoo, incorporated in Canada and operating in Quebec. As part of their business model, customers entered into a contractual relationship with Great Offers by leasing hash power to mine cryptocurrencies on Nuvoo’s equipment located in Canada, the price of these contracts varying from $4.70 to $32,400 depending on the duration of the contract and the amount of terahash chosen. The enterprise was presented as a cloud-based mining service allowing individuals to mine cryptocurrencies remotely for themselves, using Nuvoo’s mining equipment and website. Over its two years of operations, Great Offers was party to more than 3,600 contracts with 1,599 customers.
The two individuals behind this business were Martin and LeBlanc. Martin had been Chief Technology Officer and President of Nuvoo, and was also a director of Nuvoo from 2017 to 2019. He was responsible for communications at Nuvoo, and, as such, managed Nuvoo’s website and promoted the company and its services in webinars posted to YouTube and Facebook. LeBlanc was an executive for both Nuvoo and Great Offers, and was also the creator and administrator of Nuvoo’s official Facebook page.
The online offer to the public of cryptoasset mining packages supported by Nuvoo’s infrastructure is a form of investment regulated by the Securities Act
Quebec’s Securities Act (QSA) applies to “investment contracts,” which it defines as “a contract whereby a person, having been led to expect profits, undertakes to participate in the risk of a venture by a contribution of capital or loan, without having the required knowledge to carry on the venture or without obtaining the right to participate directly in decisions concerning the carrying on of the venture.”
The TMF examined the different components of this definition and came to the following conclusions:
- An undertaking by the investor
- The contracts sold by Great Offers to investors constituted an undertaking.
- […] having been led to expect profits
- In its promotional materials, Great Offers and Nuvoo used profit-seeking language such as “start earning from mining immediately” and “earning money made easy.” Nuvoo’s website also contained a link to Cryptocompare.com, which predicted the possible mining rewards from the amount of mathematical computation capacity that investors were securing with their packages. The TMF concluded that the combination of all the information received by the investors created an expectation of profits.
- […] participating in the risk of a venture by a contribution of capital or loan
- Investors contributed capital by purchasing these various contracts sold by Great Offers. Nuvoo’s “venture”, according to the TMF, consists of the acquisition of packages for mining activities to be carried out and fully managed and controlled by. LeBlanc and Martin, with the aim of making a return which is dependent on their work. In addition, among the many risks associated with the venture, the TMF noted the specific risks of power outages, lack of maintenance of the computers, excessive heating of the facilities, compromised returns and hijacking of mining activities.
- […] without having the required knowledge to carry on the venture
- Nuvoo and Great Offers offered their services to the general public on the Internet, and specified on many occasions that no knowledge was needed to start mining cryptocurrencies.
- […] without obtaining the right to participate directly in decisions concerning the carrying on of the venture
- The promotional material also boasted of the ease of mining, as a fully passive enterprise, since Nuvoo managed the mining process by purchasing and maintaining the equipment and deciding which pools to mine, for instance.
Despite the disclaimer issued by Great Offers in its communications with investors, which stipulated that the offer should not be construed as related to the sale of securities or financial products, the “economic reality” of the offer was for an investment in the cryptoasset mining activities of Great Offers and Nuvoo.
Distribution of securities by Great Offers, Nuvoo, LeBlanc and Martin in breach of the QSA
Every person intending to make a distribution of securities must prepare a prospectus and have it approved by the AMF (the Prospectus Requirement), and no person may act as a dealer, by distributing a security for their own account or for another’s account, unless the person is registered as such (the Registration Requirement). In the Tribunal’s view, LeBlanc and Martin engaged in an intermediation activity by creating and maintaining a website that allowed for the involvement of the public in an investment contract.
The Tribunal found that the legal structure set up by LeBlanc and Martin’s lawyers created an artificial separation between Great Offers and Nuvoo, with the former offering contracts to the customers and the latter only providing mining services to Great Offers. The Tribunal considered these two entities as alter egos of each other, given the many close links between them, including common officers, references (at times confusing) to one another on materials available online to potential investors and use by Great Offers of Nuvoo’s trademarks.
Penalties of $50,000 on LeBlanc and Martin and cease-trade orders
When deciding on the amount of the administrative penalties to be imposed, the Tribunal namely took into account:
- the large number of investors solicited online and their vulnerability,
- the concern shown by LeBlanc and Martin to set up a business that was in compliance with the QSA by seeking legal advice absence and the absence of any fraudulent intent on their part,
- the absence of legal precedents qualifying the mining of cryptoassets as securities at the time of the events.
The TMF decided on the sum of $50,000 each (a fraction of the sum of $200,000 suggested by the AMF) and also issued cease-trade orders against LeBlanc, Martin and the two corporate entities.
- The fact that the contracts were marketed as “cloud-mining” or leasing of hashing power was irrelevant: the TMF will examine the economic reality of the enterprise. The fact that customers were completely passive while Nuvoo effectively mined the cryptocurrency made it clear that the contracts were really investments in Nuvoo’s mining business.
- The Tribunal relied on the alter ego doctrine to find that Great Offers – the offshore corporation corporation – and Nuvoo – the Canadian corporation – were alter egos of one another, given the very close links between them.
- The TMF was adamant about the dissuasive nature of the penalties imposed: it wished to discourage any others from establishing this type of enterprise without fulfilling the prospectus and registration requirements.
 Securities Act, CQLR c V-1.1, s. 1 (2)
 Securities Act, CQLR c V-1.1, s. 11
 Securities Act, CQLR c V-1.1, s. 148 and s. 5
The author thanks Léa De Santis for her contribution to this article.