Marketing company gets first-ever penalty for deficient advertorial disclosure

A regulatory hearing panel in British Columbia sanctioned a company and its CEO for publishing advertorials and social media posts for issuers without properly disclosing their promotional nature.

The British Columbia Securities Commission (BCSC) ordered monetary sanctions against Stock Social Inc. and its CEO, Kyle Alexander Johnston, following the regulator’s finding that they violated securities law by posting on social media and distributing advertorials about various issuers in the mining, technology and cannabis sectors without adequately disclosing their promotional nature.

“We have found that the advertorials disseminated by Stock Social were singularly positive and touted certain aspects of the issuers’ businesses but failed to disclose risks or other negative factors that one would expect to find in a true editorial or report,” the panel said. “Given that, clear and conspicuous disclosure that those advertorials were disseminated on behalf of the issuers is even more important in helping investors assess the objectivity of the provided information.”

The posts didn’t clearly disclose they involved paid promotion.

“None of the advertorials made clear that they were distributed on behalf of the issuers, and although some indicated a fee had been paid for dissemination, they did not say on whose behalf,” the BCSC said in a release. “When disclaimers did appear, they were not placed in a prominent place for the reader to easily notice.”

The finding that the disclosure deficiencies amounted to a regulatory violation was a first for a BCSC panel, the release noted, stressing that disclosure enables investors to judge how much weight to give certain content, and better arms them to make informed investment decisions.

While the panel acknowledged there was no evidence that investors had been specifically harmed by the misconduct, it said “the respondents’ conduct jeopardizes public confidence in the integrity of the capital markets.”

It also noted that the misconduct was not intentional.

“This is also not a case of the respondents ignoring commission decisions or pronouncements,” it said, noting that the case “is the first enforcement proceeding” involving these specific requirements, and that there was no regulatory guidance on how to comply with these provisions when using social media.

The panel ordered a $50,000 penalty against the company, and $25,000 against Johnston.

It also sanctioned one of the firm’s clients, ordering issuer ImagineAR Inc. to pay $20,000 for failing to ensure that the posts “clearly and conspicuously disclosed” that the posts were issued on its behalf.

The panel declined to order disgorgement or impose any market restrictions on Stock Social.

BCSC staff sought over $500,000 in disgorgement and a two-year ban on engaging in promotional activities against Stock Social. They also asked for a $60,000 penalty.

The panel found that disgorgement wasn’t warranted and that a monetary penalty would be sufficient.

“In all the circumstances here, ordering disgorgement of all of the payments is disproportionate to Stock Social and the misconduct,” it said. It noted that the evidence showed not all of the money paid to the company was for the posts that were deemed to be offside, and so it concluded that the regulator had failed to establish how much the company benefited from its violation.

“We are of the view that a modest monetary sanction is needed and appropriate,” it said.

The panel noted that the respondents — Stock Social, its CEO and ImagineAR — “were cooperative, made admissions and signalled early on in the enforcement process that they would be open to doing so. Specific deterrence is not a significant concern.”

As a result, the panel also decided not to impose any market prohibitions, noting that the company is being dissolved, so there’s no need to specifically prohibit it from participating in future promotional activities.