As crypto trading platforms (CTPs) register or apply for registration as dealers under Canadian securities legislation, requirements for specific marketing, advertising and social media use apply. As we wrote about last week, the Investment Industry Regulatory Organization of Canada (IIROC) and Canadian Securities Administrators (CSA) have published their Guidance for Crypto-Trading Platforms (the Joint Notice) to clarify how CTPs can comply with these requirements when promoting their platforms. While there is no "one size fits all" approach to advertising compliance, here are five considerations to take away from the Joint Notice.
Tip #1: Avoid certain terms and misleading implications
Most CTPs should not use the words " exchange" or "marketplace" to refer to their platforms, as these are specific types of regulated entities under Canadian securities legislation, and should only be used in accordance with their statutory definitions.
CTPs should also not use their licensing or regulatory compliance to imply a level of consumer protection or regulatory safeguards. An example of a potentially false and misleading statement given in the Joint Notice is that "your crypto assets are safe with us because we meet all regulatory requirements as a fully licensed Money Services Business under Canadian legislation." This wording could be misleading because it implies that the CTP may be regulated by something comparable to securities legislation.
Remember that the general impression test under Canadian competition law means that a court will consider all aspects of a representation, not just its literal meaning.
Tip #2: Make sure your statements are supported by evidence
The Joint Notice warns that CTPs should be wary of using claims like "the most trusted," "the best" or "the safest." Any claim about performance or efficacy must be substantiated by adequate and proper testing under Canadian competition law. Similarly, advertisements must not exaggerate the nature or importance of competitive differences under the Canadian Code of Advertising Standards.
If a CTP does make these types of claims, it must have supporting evidence, including having completed due diligence on any third-party rating organizations. The CTP needs to retain any source records that support these claims. However, even referencing a third-party rating organization may be misleading if it implies a level of oversight that is commensurate with Ontario securities regulation.
It is important to remember that no one actually needs to be deceived or misled for a court to find an advertisement misleading, and that disclaimers will generally not cure a false or misleading statement.
Tip #3: Make sure endorsements fall within the general advice or newsletter exemptions
Endorsements by celebrities or others may be considered a form of recommendation or advice according to the Joint Notice. To comply with Ontario's securities regulations, endorsements must fall within general advice or newsletter exemptions.
There are two conditions a CTP must meet to fall within an exemption:
- The advice cannot be tailored to the needs of the person receiving the advice.
- The person providing the advice must disclose any financial or other interest the person has in the issuer, and this must be disclosed concurrently (see Securities Act, R.S.O. 1990, c. S.5, s. 34).
Advice may appear in a less conspicuous form than an endorsement. For example, a notification such as "Important update! X stock is rising! Don't miss out!" may constitute advice. This is especially true if the statement is contained in a targeted communication. See IIROC's guidance on what kind of communication constitutes a recommendation for more details.
Tip #4: Refrain from making misleading statements about price and compensation
If a CTP advertises that it doesn't charge any commissions, yet it takes a spread when acting as a market maker, monetizes client order flow for its benefit, or charges a commission only on a specific product, then a statement saying that the CTP does not charge commissions is probably misleading.
In addition, any price-related representations must comply with specific pricing provisions of the Competition Act. If a CTP advertises that it is "the cheapest source of Bitcoin," for example, the CTP must be able to substantiate this claim with evidence, as well as policies and procedures it has in place to obtain the best pricing. These policies and procedures should describe how CTPs evaluate whether the best price was obtained and should be reviewed regularly.
Tip #5: Don't use contests and promotions to encourage risky trading
The Joint Notice expresses significant concern around using contests, promotions, bonuses and time limits to attract investors. Specifically, these activities may encourage investors to engage in risky trading that they would otherwise avoid, and raise concerns around soliciting or inviting trade, which results in suitability obligations for CTPs. In addition to these securities considerations, promotional contests must also comply with the Competition Act's requirements of adequate and fair disclosure and the Criminal Code's provisions related to lotteries and games of chance.
When CTPs use social media for these kinds of promotional activities, they still must retain accurate and retrievable records of all their interactions with clients and potential investors. This may be especially challenging with live or disappearing content.
The Joint Notice advises that CTPs should have a social media policy that, in addition to instituting a protocol for retention and retrieval of online conversations, designates the responsibility of supervising and approving marketing communications to a specific individual and establishes a method of monitoring compliance with the policy.
Conclusion: CTPs should be guided by their good faith obligations
Registrants under securities legislation have an obligation to treat clients fairly, honestly and in good faith. They must provide clear and complete disclosure to clients of all charges and registrant compensation associated with the investment products and services they receive. They must provide meaningful reporting on how their investments perform and make reasonable efforts to achieve the best execution when acting for clients.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.