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Securities Act Compliance: Mandatory Disclosure Of Paid Promotion

Two of the primary and related goals of Canadian securities regulation are the protection of investors from fraudulent, manipulative or misleading practices and the fostering of fair, efficient, and transparent markets. Promotional activities conducted by public companies are an area of ongoing concern for Canadian securities regulators in their efforts to achieve these primary goals.

Regulatory and Legislative Changes and Initiatives

In November 2018, the Canadian Securities Administrators published CSA Staff Notice 51-356 – Problematic promotional activities by issuers[1] (the “Notice”) in which they noted they were seeing promotional activities by certain issuers that were “… either untrue or unbalanced to such an extent that they may mislead investors.” The Notice goes on to identify various types of problematic stock promotion that regulators were observing in the venture issuer marketplace (although the guidance and expectations contained in the Notice are applicable to all issuers).

One of these problematic areas was the compensation by issuers of third parties, who use social media and general investing blogs to promote issuers, but do not disclose their agency, compensation and/or financial interest. Addressing this concern, the Notice provides the following instructions to issuers:

  • the requirement 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; and
  • guidance reminding issuers to have rigorous social media disclosure controls to ensure that all disclosures are balanced and not misleading, including by prominently disclosing when reports and articles are paid for by the issuer.

In March 2020, significant and extensive amendments to the Securities Act (British Columbia) (the “Securities Act”) came into force, providing the British Columbia Securities Commission (“BCSC”) with what the BCSC has described as “the strongest powers among securities regulators in Canada to address misconduct in the financial markets.[2]” Among these amendments is the creation of a new definition of “promotional activity” that is regulated under the Securities Act. The definition of promotional activity is broad and includes any communications or activity that be expected to encourage a person to purchase, trade or not purchase a security or derivative, regardless of the platform or medium, which captures marketing activities as well as investor relations.

As a follow up to the enhancements to the BCSC’s powers under the amended Securities Act, in May 2021, the BCSC issued for a 60 day comment period a set of rules and a companion policy aimed at regulating online promotional activities.[3] The contemplated rules (“Proposed BC Instrument 51-519”) were to be applicable to all promotional activity regardless of platform or medium, including newsletters, financial blogs, emails, oral statements, social media posts or videos, as long as there is a real or substantial connection to B.C., subject to some exceptions for activities performed by directors, officers, and employees of the issuer. Written disclosure would require the party conducting promotional activity to disclose the issuer on whose behalf they are making the promotion, how much the compensation for the promotion is, whether the person making the promotion owns securities or derivatives related to the issuer, where the promotion is being conducted and other facts which might reasonably interfere with the objectivity of the person making the promotion. An additional requirement of issuing an initial news release containing specified information as well as subsequent news releases, would be applicable to venture issuers.

The Settlements

Although Proposed BC Instrument 51-519 has not come into force, the BCSC is clearly taking action against undisclosed online paid promotional activities in reliance on the provisions of the Securities Act. The key provisions are section 52(2) and section 168.2(1):

Disclosure of investor relations activities

52(2) A person engaged in investor relations activities, and an issuer or security holder on whose behalf investor relations activities are undertaken, must ensure that every record disseminated, as part of the investor relations activities, by the person engaged in those activities clearly and conspicuously discloses that the record is issued by or on behalf of the issuer or security holder. 

Contraventions attributable to employees, officers, directors and agents

168.2(1) If a person, other than an individual, contravenes a provision of this Act or of the regulations, or fails to comply with a decision, an employee, officer, director or agent of the person who authorizes, permits or acquiesces in the contravention or non-compliance (securities act compliance and disclosure interpretations) also contravenes the provision or fails to comply with the decision, as the case may be.

Since July 2022, the BCSC has entered into five settlement agreements with issuers or individuals or both related to failure to disclose the fact that promotional activities online and on social media were paid for by the issuer.

  1. On July 4, 2022, the BCSC entered into a $35,000 settlement agreement with a software issuer listed on the Canadian Stock Exchange (“CSE”) and its former communications officer in connection with the failure to disclose that five advertorials and promotional Twitter posts from 2016 were issued on the issuer’s behalf by a paid marketing company.[4] The advertorials were written to look and read like objective journalistic content, but did not disclose that they were issued on behalf of the issuer. Two of the advertorials indicated a distribution fee had been paid, but did not specify who was paying for it. The promotional social media posts by nine social media influencers and by the marketing company did not disclose that they were issued on behalf of the issuer. The issuer and the former communications officer admitted that they were in breach of the requirements under the Securities Act for anyone engaged in investor relations activities, or who is doing so on behalf of an issuer or security holder, to clearly and conspicuously disclose when promotional materials are issued by them or on their behalf.
  1. On August 4, 2022, the BCSC entered into a $35,000 settlement agreement with a mineral exploration and development company listed on the TSX Venture Exchange and its president, CEO, and director in connection with the failure to disclose that an advertorial disseminated on newswires and websites and multiple promotional posts by nineteen social media influencers on various social media platforms including Twitter, LinkedIn, investFeed, iHub, and Facebook from 2017 were issued on the company’s behalf by a paid marketing company.[5] The advertorial was written in the style of a news article designed to look and read like objective journalistic content but none of the disseminations disclosed that the advertorial was issued on behalf of the issuer. None of the promotional social media posts disclosed they were issued on behalf of the issuer. The issuer and the president, CEO, and director admitted that they were in breach of the requirements under the Securities Act for anyone engaged in investor relations activities, or who is doing so on behalf of an issuer or security holder, to clearly and conspicuously disclose when promotional materials are issued by them or on their behalf.
  1. On September 9, 2022, the BCSC entered into a $10,000 settlement agreement with the former president, CEO, and director of a former CSE listed issuer in connection with the failure to disclose that six advertorials about the issuer disseminated on newswires and websites, and multiple promotional posts about the issuer on Facebook from 2017 and 2018 were issued on the issuer’s behalf by a paid marketing company.[6] The former CSE issuer was acquired by another listed issuer in 2020 and ceased to be reporting. Despite the inclusion of a warranty in the issuer’s agreement with the marketing c#_ftn6ompany that all publications would be made in compliance with securities laws, the disclosure required under section 52(2) of the Securities Act was not made. Neither the social media posts nor the published advertorials disclosed that they were issued on behalf of the issuer. Some published advertorials indicated a distribution fee had been paid but did not clearly and conspicuously disclose that they were issued on behalf of issuer. The former president, CEO, and director admitted he contravened the Securities Act by failing to ensure, as a person engaged in investor relations activities, that the published advertorials and social media posts clearly and conspicuously disclosed they were issued on behalf of the issuer.
  1. On September 12, 2022, the BCSC entered into a $10,000 settlement agreement with a former senior strategic advisor to a CSE listed issuer in connection with the failure to disclose that an advertorial about the issuer disseminated on a website and posts by six social media influencers and a marketing company on Twitter from 2016 were made on the issuer’s behalf by the paid marketing company.[7] The advertorial was written in the style of a news article designed to look and read like objective journalistic content; however, it did not disclose that it was issued on behalf of the issuer. None of the promotional social media posts disclosed they were issued on behalf of the issuer. The advisor introduced the marketing company to the issuer and participated with directors and officers of the issuer in the preparation and review of the materials produced by the marketing company, and thereby authorized, permitted or acquiesced in the issuer’s contravention of section 52(2) of the Securities Act by failing to ensure that the advertorial and social media posts clearly and conspicuously disclosed they were issued on behalf of the issuer.
  1. On September 14, 2022, the BCSC entered into a $35,000 settlement agreement with a mining company listed on the CSE and its then president, CEO and director in connection with the failure to disclose that six advertorials about the issuer disseminated on newswires and websites, and multiple promotional posts about the issuer by seventeen social media influencers on various social media platforms including Twitter, Facebook, and LinkedIn from 2017 were issued on the issuer’s behalf by a paid marketing company.[8] The advertorials were written in the style of news articles designed to look and read like objective journalistic content. Some inconspicuously directed readers to a disclaimer on a separate website. Others indicated a fee had been paid but neither the payor nor the payee was identified. Others indicated the issuer as the source of payment but stated that the author was a third-party and that the content was not the issuer’s opinion. None of the promotional social media posts disclosed they were issued on behalf of the issuer. The issuer and the then president, CEO and director admitted that they were in breach of the requirements under the Securities Act for anyone engaged in investor relations activities, or who is doing so on behalf of an issuer or security holder, to clearly and conspicuously disclose when promotional materials are issued by them or on their behalf.

Takeaway for Issuers

  • The BCSC has its eyes on purchased online and social media promotional activities by issuers and is pursuing enforcement against issuers who do not make the legally required disclosure.
  • Make sure that every paid promotional story (every time it is disseminated) or social media post CLEARLY and CONSPICUOUSLY discloses that they are ISSUED ON BEHALF OF THE ISSUER and PAID FOR BY THE ISSUER.
  • It is not enough to have a provision in every contract with an investor relations or marketing services provider that the services will be provided in compliance with securities laws (although your contract should include such a provision); the management or directors or consultants who are involved with the marketing services and service providers need to make sure that the paid promotions are in compliance with the requirements of the Securities Act under section 52(2) in order to avoid liability under section 168.2(1).

For more information on any of the above or to connect with one of our experienced securities lawyers in Vancouver, feel free to contact us at 1-800-604-1312 or via e-mail at [email protected].

Article written by Evie Sheppard, Of Counsel, Corporate and Securities Lawyer.