‘Abusive’ short-selling in regulators’ sights

Early stages of project

TORON TO • Canada’s securities watchdogs are teaming up to determine whether and how much “abusive” short selling is taking place in the country’s capital markets.

The Canadian Securities Administrators, an umbrella organization that coordinates the activities of Canada’s 13 provincial and territorial market watchdogs, is in the preliminary stages of a project that involves reviewing "the nature and extent of abusive short-selling in Canadian capital markets,” Brian Kladko, a public affairs manager at the British Columbia Securities Commission, said Thursday.

“We are in the information-gathering phase of this initiative,” he said in an interview, speaking on behalf of thecsa.

His comments followed the publication of a CSA notice on a separate topic: problematic promotional activities by companies. While that report was concerned with promotional campaigns that “appear to be undertaken for the specific purpose of artificially promoting interest” in the companies’ securities, the CSA said it was planning a separate project to analyze the impact of activist short sellers on Canada’s capital markets.

Activist short selling has been on the rise in Canadian markets in the past few years, with some prominent short sellers using social media outlets such as Twitter to publicize their positions and amplify their views. This has added a new dimension to the friction between investors seeking growth and those who borrow shares in a bet the price will fall so they can profit from the difference when they return the shares.

The regulators declined to comment further Thursday on whether their focus on short selling will be on trading rules, communications, or some other aspect of short campaigns.

They were clearer on their response to “problematic” promotional activities they are seeing in emerging sectors such as cryptocurrency, cannabis, and blockchain, as well as mining.

In Thursday’s notice, the CSA warned that its concerns extend beyond the venture marketplace and may result in a regulatory response ranging from requiring a company to issue a “clarifying” news release to referring the matter to enforcement.

“We will continue to monitor promotional activity and we will consider whether the scope and extent of problematic promotional activities require compliance or enforcement regulatory action to protect investors and the integrity of our capital markets ,” the regulatory organization said in the notice.

The CSA is particularly concerned about promotional activities regulators have observed that are either untrue or are “unbalanced to such extent that they may mislead investors.”

The regulators did not name any names in connection with the troubling promotional activities, though they did elaborate on specific instances. Among them were cases where a company announces a name or business change that references an association with the cannabis sector or a hot emerging technology or mineral —such as block chain or cob alt—without a supporting business plan.

There have also been instances where a positive event such as a large acquisition is announced and then

WE WILL CONTINUE TO MONITOR PROMOTIONAL ACTIVITY.

the transaction is changed or cancelled without an announcement, and others where numerous news releases are issued that do not disclose any new material facts.

In another iteration of the trend that regulators find concerning, and which they say has the potential to mislead, third parties are compensated to use social media and investing blogs to promote companies without disclosing their compensation or financial interest.

Social media use is an area of increasing focus for regulators, and the CSA is also zeroing in on social media posts that describe early-stage plans with “unwarranted certainty” or make unsupported assertions about the growth of markets or demand for a certain product.