A recent announcement by Canadian securities regulators demonstrates their growing concern with biased promotional materials, and highlights the risks to issuers when engaging with prospective investors.
The regulators state that they are seeing promotional activities by issuers that are either untrue or unbalanced to such a degree that they can mislead investors, with such activities being undertaken for the specific purpose of artificially promoting interest in the issuer's securities. This artificial inflation of interest then increases the issuer's share price and trading volume, which undermines the integrity of the capital markets and puts investors at risk of harm from making misinformed investment decisions.
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The securities regulators note that they will be undertaking a separate project to analyze the impact of activist short sellers on the Canadian capital markets. Combined with the announcement on a stricter approach to promotional activities, this signals a heightened sensitivity to investor protection in the Canadian capital markets.
In addition, while the examples of misleading promotional activities given in the recent announcement relate to activity the regulators are seeing in the venture issuer marketplace, they make it clear that their expectations regarding disclosure and promotional activities apply to all issuers. Issuers of all stripes should therefore take note of this announcement, and review their promotional practices to investors accordingly.
What do the Regulators Mean by Misleading?
The regulators provide a non-exhaustive list of examples of promotional activities that may potentially be misleading:
- disseminating presentations, marketing materials, social media posts, or other information that describe early-stage plans with unwarranted certainty, or make unsupported assertions about growth of markets or demand for a product;
- issuing numerous news releases that disclose no new material facts;
- compensating third parties, who use social media and general investing blogs to promote issuers, but do not disclose their agency, compensation and/or financial interest;
- announcing an issuer name and/or business change to reference an emerging industry or technology such as block chain, cannabis, battery minerals, or cryptocurrency without a supporting business plan or comprehensive risk disclosure;
- announcing a positive event such as a large acquisition then subsequently changing or cancelling the transaction with no announcement; in addition, failing to disclose in the initial announcement the material conditions necessary to complete the transaction such as financing or due diligence, and failing to file corresponding material contracts or material change reports; and
- disclosing details about mineral projects that:
- suggest without direct evidence from sampling or exploration, that a property holds high potential for development including production (for example, including photos of assayed core beside new core, to imply mineralization prior to third party verification);
- rely on projected peak versus long-term commodity prices; or
- imply that a property holds a specific fair market value without a feasibility report.
What are the Risks to Issuers?
The regulators note that problematic promotional activities may result in enforcement action or other regulatory responses such as requiring issuers to:
- issue a clarifying news release;
- retract or remove overly promotional language from their disclosure record including their website and/or social media; and
- re-file continuous disclosure documents.
The regulators will continue to monitor promotional activity and consider whether the scope and extent of problematic promotional activities require compliance or enforcement regulatory action to protect investors and the integrity of Canadian capital markets.
How can Issuers Mitigate Risk?
While attracting investors is critical to an issuer's success, the promotional activities must at a minimum comply with all relevant securities laws and follow guidance, including:
- general prohibitions against:
- false or misleading statements that would be expected to have a significant effect on the price or value of an issuer's securities;
- acts, practices or conduct relating to securities that result in or contribute to a misleading appearance of trading activity or an artificial price for a security;
- requirements that every investor relations record disseminated by or on behalf of an issuer or security holder must clearly and conspicuously disclose that the record is being issued by or on behalf of that issuer or security holder;
- requirements that an issuer must not disclose forward-looking information ("FLI") unless the issuer has a reasonable basis for the information, and requirements that any such disclosure must:
- identify FLI as such;
- caution users that actual results may vary from the FLI and identify material risk factors that could cause actual results to differ materially from the FLI;
- state the material factors or assumptions used to develop FLI;
- requirements to update previously disclosed FLI when events and circumstances occur that are reasonably likely to cause actual results to differ materially;
- guidance on general disclosure including:
- the types of events or information that may be material;
- avoiding exaggerated reports and potentially misleading promotional commentary;
- establishing appropriate board and senior officer oversight over oral, written, and electronic disclosures;
- issuers not participating in, hosting, or linking to chat rooms or bulletin boards;
- reinforcing the need to also comply with exchange disclosure policies; and
- guidance reminding issuers to have rigorous social media disclosure controls and reiterating the regulators' expectations that issuers ensure that all disclosures regardless of venue are balanced and not misleading, including by/through:
- not making misleading statements and not excluding facts needed to avoid misleading readers;
- announcing material changes in a factual and balanced way;
- disclosing unfavorable news as promptly and completely as favorable news;
- avoiding exaggerated reports or potentially misleading promotional commentary;
- appropriately disclosing and using FLI;
- not cherry-picking analyst reports; and
- prominently disclosing when reports and articles are paid for by the issuer.
 CSA Staff Notice 51-356 Problematic promotional activities by issuers.
*This article was prepared with assistance by Kean Silverthorn, Articling Student in our Vancouver office.