Last month, the Court of Quebec (Criminal and Penal Division) rendered its decision on the culpability of three defendants involved in the initial coin offering of the cryptocurrency known as “PlexCoin”.
Dominic Lacroix (Lacroix), the head of the PlexCoin project, Sabrina Paradis-Royer (Paradis-Royer), Lacroix’s spouse and employee, and Yan Ouellet (Ouellet), head of IT for the project, were each charged by the Autorité des marchés financiers (AMF), the Quebec securities regulator, with violations of the Quebec Securities Act. In a 50-page decision, the Court of Quebec found that Lacroix and Ouellet were guilty of all counts, but acquitted Paradis-Royer.
On August 6, 2017, PlexCorps, a subsidiary of Lacroix’s holding company, began to sell the cryptocurrency PlexCoin as part of 29-day initial coin offering. In the weeks preceding the “pre-sale” of these coins, through Facebook posts, posts on the PlexCorps website, and a white paper published on August 4, 2017, PlexCorps claimed to be offering an extraordinary opportunity to acquire the next global decentralized cryptocurrency. According to the AMF, however, the picture presented by PlexCorps was grossly distorted, and the PlexCoin project was, for the most part, an empty shell.
On June 19, 2020, the AMF formally charged Lacroix, Paradis-Royer, and Ouellet before the Court of Quebec with infractions under the Securities Act, namely: (i) illegal distribution of securities without a prospectus to investors in Quebec and abroad under sections 11 and 12 (Lacroix); (ii) making misrepresentations in respect of a transaction in a security under section 197 (Lacroix); and (iii) aiding a person committing the infraction of illegal distribution of securities under section 208 (Paradis-Royer and Ouellet).
On December 11, 2023, the Court of Quebec issued its findings on the culpability of the defendants. Below are the highlights of the decision.
Purchases of crypto as “investment contracts”
The first issue in dispute was whether the transactions concluded between PlexCorps and buyers in the context of the initial coin offering even qualified as “investment contracts” under section 1 of the Securities Act. Counsel to Lacroix argued, among other things, that as a cryptocurrency PlexCoin did not fall within the scope of the Act. In support of that assertion, reference was made to certain webpages of the AMF stating that the latter did not regulate cryptocurrencies as securities.
For the Court, however, PlexCorps had gone far beyond simply issuing a cryptocurrency. Through the white paper as well as online posts, PlexCorps advertised that funds obtained through PlexCoin’s initial coin offering would be reinvested in the project, namely in order to create a cryptocurrency trading platform, PlexWallet, as well as issue a Visa credit card, the PlexCard, both of which would allow users to conduct commercial transactions in PlexCoin and trade it across the world. Proceeds would also be used to set up “PlexBank”, a virtual bank that would introduce a measure of stability to the new cryptocurrency. In short, buyers of PlexCoin were being offered a chance to participate in the creation of a revolutionary new financial “ecosystem”.
In light of the above, the Court concluded that the AMF had established beyond a reasonable doubt that the purchase of PlexCoins as part of the initial coin offering satisfied each of the four elements required to qualify as an “investment contract” under the Securities Act: (i) investors had concluded a contract with PlexCorps, the terms of which were set out in the white paper; (ii) investors had acquired PlexCoins with an expectation of profit based on representations made to them regarding all aspects of the PlexCoin project, including the PlexWallet, PlexCard, and PlexBank subprojects; (iii) in making a capital contribution, investors had participated in the risk involved in the PlexCoin venture; and (iv) investors did not have either the requisite knowledge, or the right, to participate directly in decisions relating to the carrying on of the venture.
Two Convictions and an Acquittal
The Court then proceeded with the analysis of the evidence in support of the charges brought against each of the defendants.
With respect to Lacroix, the Court found the evidence implicating him in the PlexCoin project to be “abundant and, most importantly, credible”. The testimony of former employees revealed that he had been the “maestro” at the head of a small team of approximately 10 people, responsible for all major decisions regarding the development and launch of PlexCoin. In short, according to the Court, “Lacroix was PlexCorps”. The AMF had established beyond a reasonable doubt that in creating PlexCorps and PlexCoin, Lacroix had sought to distribute securities subject to a prospectus obligation to multiple investors, both within and outside Quebec, without filing the required prospectus.
The Court also found Lacroix guilty of the offence under section 197(1) of the Securities Act, namely that of making a misrepresentation in respect of a transaction in a security. In the Court’s view, , Lacroix had made numerous embellishments and even lied in the white paper and online posts: the team working on PlexCoin did not consist of up to 53 people, but 10 at most; none of the team members had the training or experience that had been alleged; PlexCorps’s offices were not in Singapore, but in Quebec City, and PlexCorps did not have any relationship with Visa as advertised. Most importantly, the potential profits of 1 354% dangled before investors in the white paper were utterly fanciful.
With respect to Paradis-Royer and Ouellet, the Court noted that two elements had to be considered for the infraction of “aiding” the commission of the infractions established under sections 11 and 12 of the Securities Act: first, proof that the defendant’s actions had the actual effect of assisting in the realization of a securities investment without prospectus; second, knowledge that the infraction was underway or would be committed.
The Court concluded without much difficulty that both elements were satisfied concerning Ouellet, who had conceived, developed, or otherwise helped create the “technological tools” that had allowed Lacroix to realize his vision. The Court reached a different conclusion for Paradis-Royer, however. In her case, the circumstantial evidence presented was too scarce to support a finding of guilt beyond a reasonable doubt. Her position and the nature of her role within the PlexCoin project was much more ambiguous than that of Ouellet, and subject to contradictory testimony.
This case illustrates the trend towards more muscular enforcement of securities legislation by regulators against actors operating in the cryptocurrency space. Where individuals or businesses offering cryptocurrencies cross the line into distributing financial instruments that qualify as securities, and where they do not scrupulously adhere to securities regulations, the consequences can be severe.
 The AMF had been investigating Lacroix since May 2017, and had sought and obtained an order barring Lacroix and PlexCorps from issuing securities on July 20, 2017. It obtained convictions that October for contempt of court when PlexCorps went ahead nonetheless with the initial coin offering.