On November 29, 2018, the Canadian Securities Administrators (CSA) released CSA Staff Notice 51-356 Problematic promotional activities by issuers (Staff Notice), which cautions companies to avoid disclosure and promotional practices that are manipulative or that may mislead investors. The Staff Notice sets out the CSA’s expectations for issuers in complying with securities law requirements as well as guidance in relation to the conduct of promotional activities.
The Staff Notice provides the following illustrations of potentially misleading promotional activities that have been observed specifically in the venture issuer marketplace:
- Disseminating information that describes uncertain early-stage plans or makes unsupported assertions about growth of markets or demand for a product
- Issuing numerous press releases that disclose no new material facts
- Compensating third parties who promote issuers through social media or blog platforms without disclosing their agency, compensation and/or financial interest
- Announcing, in the absence of a supporting business plan or comprehensive risk disclosure, a change of issuer name and/or business to reference an emerging industry or technology, such as cannabis or cryptocurrency
- In announcing a transaction, failing to disclose material conditions required for its completion or failing to announce a change or cancellation of a previously announced transaction
- With respect to mining projects, disclosing information implying that a property has a high potential for development without any direct evidence from sampling or exploration, or that a property holds a specific fair market value in the absence of a feasibility report, or relying on projected peak rather than long-term commodity prices.
The Staff Notice articulates that the CSA are concerned that such promotional activities artificially increase an issuer’s share price or trading volume, thereby undermining the integrity of the capital markets and putting investors at risk of harm by making misinformed investment decisions.
RULES AND GUIDANCE
The Staff Notice reminds all issuers that they are expected to comply with applicable securities laws and guidance when engaging in promotional activities, highlighting certain basic “rules of the road”:
- Issuers are prohibited from making false or misleading statements that would be expected to have a significant effect on the price or value of an issuer’s securities, or from engaging in 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
- There must be clear and conspicuous disclosure of attribution with respect to investor relations records disseminated by, or on behalf of, an issuer
- Disclosure of forward-looking information (FLI) is specifically regulated: FLI must have a reasonable basis, be identified as such, contain cautionary language, state the material factors or assumptions underpinning it and be updated in light of subsequent events that impact on such information
- Guidance with respect to general disclosure, such as that contained in National Policy 51-201 Disclosure Standards, should be adhered to, including with respect to:
- Identifying events or information that may be considered material
- Establishing appropriate board and senior officer oversight over disclosures, whether oral, written or electronic
- Issuers not participating in, hosting, or linking to chat rooms or bulletin boards
- Compliance with exchange disclosure policies.
- Guidance with respect to social media, with specific reference to CSA Staff Notice 51-348 Staff’s Review of Social Media Used by Reporting Issuers, should be adhered to, and in particular, issuers are expected to have rigorous social media disclosure controls and ensure that all disclosures regardless of venue are balanced and not misleading. Please see our March 2017 Blakes Bulletin: New Medium, Same Expectations: CSA Cautions Canadian Public Issuers on Use of Social Media for more information.
The Staff Notice states that the CSA will continue to monitor promotional activities and will consider whether the scope and extent of such activities require compliance or enforcement action to protect investors and the integrity of the capital markets. Such regulatory responses may include requiring an issuer to issue a clarifying news release, to retract or remove overly promotional language from their disclosure record, including their website or social media, or to re-file continuous disclosure documents.
Factual and balanced public disclosure is a basic tenet of securities law, applying throughout the issuer’s lifecycle as a public company. Disclosure that deviates markedly from this tenet runs contrary to the integrity of the capital markets and ultimately may constitute an offence. The rules and guidance referred to by the CSA in the Staff Notice apply to all issuers regardless of their stage of development or market capitalization. While smaller issuers or newcomers to public markets may be overlooked by traditional business news coverage and, therefore, may feel driven to take more extreme measures to garner the attention of the markets, the Staff Notice reminds all issuers of the serious consequences of doing so.
In addition to the potentially unrecoverable damage to an issuer’s reputation, and possible regulatory responses addressed in the Staff Notice, issuers are reminded that misleading or false disclosure generated in the context of promotional activities also expose issuers and their directors to penal sanctions as well as secondary market civil liability, including class actions by aggrieved investors.
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