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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
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Canada | Publication | October 13, 2021
The Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) have published guidance regarding the advertising, marketing and social media rules applicable to crypto-trading platforms (CTPs). Staff Notice 21-330 (SN 21-330) offers guidance as to how CTPs may responsibly advertise, market, and use social media to promote their services, while providing a cautionary note on potential risks.
SN 21-330 focuses on three key themes, which are prevalent in using social media to market crypto assets: (i) potentially false or misleading advertising, (ii) the use of contests and promotions, (iii) and compliance and supervisory challenges.
As a preliminary matter, it should be noted that SN 21-330 does not apply to all CTPs. Rather, the guidance applies only to CTPs that facilitate trading in crypto assets that are considered securities or derivatives (which may include commodities, such as digital currencies, depending on the user’s contractual rights relating to the underlying crypto assets) or to CTPs considered “dealers” and/or “marketplaces” under the applicable securities laws.
SN 21-330 is not applicable to CTPs that facilitate trading in crypto assets that are not securities or derivatives (such as utility tokens, or non-fungible tokens), nor to CTPs that are not considered “dealers” and/or “marketplaces” under applicable securities laws. Additional commentary from the CSA regarding the factors that may cause a crypto asset to be identified as a “security” is available here and here.
CTPs are prohibited from making misleading statements that may affect an investor’s decision to enter into a relationship with the CTP, or in the case of a CTP registered as a dealer (a registered CTP), which would otherwise undermine their ability to fulfill their obligations under applicable securities legislation and IIROC rules.
The CSA has specifically directed CTPs to avoid making false or misleading statements regarding:
The CSA discussed the prevalence of marketing strategies related to contests, promotions, and time-limited reward-systems aimed at creating urgency among investors to participate in investment opportunities, taking the position that such strategies may inappropriately incentivize excessively risky investor behavior.
As an example of a practice to avoid, the CSA highlighted the use of a promotional bonus, where rewards or interest would be offered to the first 500 investors who take action within a defined period. Such a strategy is designed to create the feeling that an investor is “missing out,” thereby encouraging risky behavior. By using such strategies, CTPs risk violating their obligations to each of their clients and the capital markets, generally, including the duty to treat clients fairly, honestly, and in good faith.
Furthermore, these activities may also be considered a form of solicitation or invitation to trade. A solicitation will trigger a CTP’s obligation to ensure the trade in question is suitable for its clients. The contest-based structure of such strategies makes it questionable whether the CTPs can actually determine the suitability of their recommendations. This is particularly important for CTPs who rely on exemptions from the suitability requirements (exempt CTPs). All exempt CTPs should ensure their advertising practices are consistent with the terms of their exemption.
The CSA expects registered CTPs to remain cognizant of their compliance and supervisory obligations when using social media to market crypto assets. SN 21-330 identifies two main areas of risk in social media marketing – record-keeping risks and supervisory risks.
The use of social media marketing practices creates a risk that CTPs are not maintaining adequate records of their business activities, financial affairs, and client transactions. The real-time interactions and posting inherent in social media may result in posts slipping through the cracks of a CTP’s record-keeping system. SN 21-330 recommends that CTPs maintain systems that can retain and retrieve this real-time content.
CTPs should also determine the extent of supervision necessary for their social media platforms, to ensure nothing posted online is false or misleading. The CSA reminded CTPs that their supervisory obligations extend beyond the use of social media by the CTP, and encompass use by the CTP’s directors, officers, employees, shareholders, and any third parties that may be acting on behalf of the CTP.
Finally, CTPs are required to adopt policies and procedures governing the use of social media for marketing. The CSA clarified that these policies and procedures should relate to:
Advertising, marketing and social media can be essential tools for a CTP. However, these tools can also expose CTPs to a number of legal risks if they are not utilized carefully. CTPs should familiarize themselves with the guidance provided in SN 21-330 to ensure compliance with securities legislation and IIROC rules. CTPs would be wise to specifically review the illustrative examples provided by the CSA in “Appendix A” of SN 21-330 for further reference.
The full text of Staff Notice 21-330, Guidance for Crypto-Trading Platforms: Requirements relating to Advertising, Marketing, and Social Media Use, is available here.
The authors wish to thank Andrew Hopkins, articling student, for his help in preparing this legal update.
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