On May 26, 2021, the BC Securities Commission (the “Commission”) proposed a series of new disclosure requirements in relation to the marketing or promotion of securities. The proposals are subject to a 60-day comment period, after which the Commission may adopt the new rules.
The Commission has indicated that it is proposing these rules in the face of what it describes as the rapid rise of online stock promotion which has resulted in an increase in social media posts, blogs, newsletters and videos encouraging (or sometimes discouraging) investment in a plethora of different companies. Combined with recent changes to the BC Securities Act (the “Act”), these new rules will require people and businesses who engage in a broad range of marketing activity to actively disclose information such as their compensation, stock holdings and their intentions related to the trading of the security.
The Commission stated its intent is to provide investors with more information to assess the reliability of online stock promotions and help them assess how much weight to give to a specific promotion. Additionally, certain “venture issuers” will be required to disclose their marketing expenditures and file news releases when engaging a third party to provide these services.
Although the new rules are targeted at online marketing activity, it is important to note the rules as written cover all marketing activity, regardless of the medium.
Who is subject to the proposed rules?
In March 2020, significant amendments to the Act came into force which created a new definition of “promotional activity” that is regulated under the Act. What counts as promotional activity under the Act is now quite 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 medium. This would encompass activity that have been thought of as marketing as opposed to investor relations. Additionally, the freshly amended section 50(3) of the Act brought in new prohibitions against making certain false or misleading statements when engaging in promotional activity.
Pursuant to these newly granted powers, the Commission is now planning to be the first jurisdiction in Canada to bring in rules aimed at regulating online promotional activities. The rules, provisionally named BC Instrument 51-519, apply to any person or company conducting marketing or promotional activities in BC and any promotional activity with a “real and substantial connection” to BC, which may include a person or company who conducts promotional activity:
- targeted at a person in BC;
- related to a reporting issuer in BC;
- related to an issuer whose operations are directed from or conducted in BC;
- related to an issuer whose shares trade on the TSX, TSX Venture Exchange, or the Canadian Stock exchange; and
- related to a derivative where the counterparty who is resident or whose operations are directed from or conducted in BC.
The scope and breadth of the Commission’s power is incredibly broad and covers many people and companies not located in BC itself. As an example, anyone who makes a social media post or blog post speculating on the share price of a public corporation registered in BC are stated to be captured by the proposed rules.
The proposed rules do contain certain exemptions for promotional activities conducted by:
- an issuer promoting its own securities, if conducted by directors, officers and employees that identify themselves as acting for the issuer;
- registrants under the Act engaging in registerable activities (e.g. investment advisors offering investment advice to a client);
- international dealers and advisors with an exemption under s. 8.18 or s. 8.26 of NI 61-103;
- certain US dealer-brokers and advisers who operate in BC with an exemption under BC Instrument 32-525; and
- investment funds or people and companies conducting promotions for an investment fund.
What are the new disclosure requirements for promotional activities?
There are seven categories of disclosure required under the proposed rules:
- Engagement: if a promoter (including those historically thought of as providing marketing services) has been retained to conduct promotional activities, the promoter must disclose who they have been retained by;
- Compensation: if a promoter has received or may receive compensation in any form, including in securities or derivatives, the promoter must disclose the person or company providing the compensation, a description of the compensation, and a statement that this disclosure is required by law;
- Ownership of securities: if a promoter directly or beneficially owns, controls or directs a security or related instrument in the subject of the promotional activity, they must disclose that they have an interest;
- Ownership of derivatives: if a promoter has an interest in a derivative or the underlying interest of a derivative that is the subject of the promotional activity, they must disclose that they have an interest;
- Intentions: if a promoter has an intention to acquire, dispose, or otherwise trade or transact a security, derivative or related financial instrument, they must disclose their intention (e.g. short sellers must disclose they intend to short a stock in any blog postings they write);
- Platform: promoters must disclose which platforms or mediums the promotional activity will be conducted on; and
- Conflicts of interest: promoters must disclose any conflict of interest in relation to the activity.
This disclosure must be done anytime a promoter (or marketer) engages in promotional activity as defined by the Act. Additionally, if the disclosure is in written form, such as on a sign, a website or attached to a social media post, the disclosure must be prominently displayed.
Furthermore, a person or company who retains or compensates a third party promoter must disclose the same categories of information to any person or company who requests information on a specific promotional activity. As an example, an issuer would have to disclose that they hired a promoter to conduct marketing on social media and how the promoter is being compensated upon request.
A person or company who retains or compensates a third party promoter must also provide sufficient oversight to ensure that the promotional activities are accompanied by the proper disclosure. This creates the possibility of sanctions against issuers who fail to take steps to ensure that the proper disclosure is provided.
What are the new disclosure requirements for venture issuers?
The proposed rules define a venture issuer as any reporting issuer that is not listed on:
- the TSX;
- the NEO Exchange;
- a marketplace or exchange located outside of Canada with the exception of the Alternative Investment Market of the London Stock Exchange or the PLUS markets (issuers listed on these two markets are captured by the definition of venture issuer).
Any such venture issuer will be subject to the new news release and Management Discussion and Analysis (“MD&A”) disclosure requirements under the proposed rules.
Venture issuers must promptly file a news release when they arrange for a promoter in relation to the venture issuer’s securities, whether the promoter will receive compensation or not. The news release must include:
- the name, business address, email and telephone number of each promoter;
- a description of the relationship between the promoter and the venture issuer;
- the dates and platform that the promotional activity will take place on;
- the nature of the promotional activity; and
- any compensation that has been paid or may be paid to the promoter, including securities and derivatives.
The news release must be updated if a significant change related to the information in the original news release occurs.
Additionally, venture issuers whose spending on promotional activities exceed 10% of their total operating expenses in an annual or interim period must disclose the components of their spending on promotional activities in the corresponding annual or interim MD&A reports.
The proposed rules cover an incredibly broad range of activities including any online securities promotion or marketing, such as social media postings, blog posts, newsletters, emails, and videos. Any businesses engaged in the promotion of securities that may be connected to BC may be subject to the new requirements and should review them carefully and seek legal advice. Potential sanctions for breaching the proposed rules include being prohibited from engaging in securities promotion.
Additionally, venture issuers captured by the proposed rules should prepare to draft news releases whenever they outsource promotional activities and update their MD&A templates to conform with the new requirements.
The Commission is requesting that public feedback on the proposed rules be submitted by July 26, 2021. More information can be found on the Commission’s website.