Canadian Securities Regulators Urge Caution on Promotional Activities

On November 29, 2018, the Canadian Securities Administrators (CSA), published CSA Staff Notice 51-356 - Problematic Promotional Activities by Issuers (Staff Notice), cautioning issuers to avoid promotional activities that may artificially increase their share price or trading volume, or may mislead investors.

Problematic Promotional Activities

According to the Staff Notice, examples of promotional activities that may be misleading include:

  • 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 (for example, blockchain, 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; 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;

    • Rely on projected peak versus long-term commodity prices; or

    • Imply that a property holds a specific fair market value without a feasibility report.

Regulatory Responses

The Staff Notice warns that problematic promotional activities may result in enforcement action or other regulatory responses such as requiring an issuer 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.

Relevant Securities Law and Guidance

When engaging in promotional activities, the CSA expects issuers to comply with all relevant securities laws and guidance, including the following which are set out in the Staff Notice:

  • 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;

  • General prohibitions against 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 unless the issuer has a reasonable basis for the information and requirements that any such disclosure must:

    • Identify forward-looking information as such;

    • Caution users that actual results may vary from the forward-looking information and identify material risk factors that could cause actual results to differ materially from the forward-looking information;

    • State the material factors or assumptions used to develop forward-looking information;

  • Requirements to update previously disclosed forward-looking information 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 our expectations that issuers ensure that all disclosures regardless of venue are balanced and not misleading, including by/through:

    • Not making misleading statements;

    • 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 forward looking information;

    • Not cherry-picking analyst reports; and

    • Prominently disclosing when reports and articles are paid for by the issuer.

You can view the Staff Notice here.

DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.

Farzad Forooghian