Regulating Likes and Listings: The Rise of the Finfluencer and the Implications for Securities Law in Canada

(disponible uniquement en anglais)

par Disha Mittal

INTRODUCTION

Social media platforms were created on the premise of sharing one’s personal life with family, friends, and even strangers; however, they have evolved to become business tools that allow people and businesses to share information, products, and services with their target audience.¹ For example, “influencers” are individuals with a large number of followers on their social media platform who promote specific products and/or services in order to “influence” their followers to purchase them.² In turn, the influencer often receives compensation in the form affiliate marketing, goods and services, endorsement deals, or contracts that enable the influencer to become a producer or provider of goods or services themselves.³ A more recent phenomenon in the world of social media is the “finfluencer.”⁴ A finfluencer is a financial influencer who promotes investment products and provides financial “advice,” including investment advice.⁵ Finfluencers range from celebrities, such as Kim Kardashian, to corporate personalities, such as Elon Musk, to ordinary investors that organically build their social media following.⁶ Finfluencers’ followings are mostly comprised of retail investors, and their content usually focuses on providing educational information and opinions.⁷

The emergence of finfluencers over the past few years has given rise to legal concerns about investor protection.⁸ However, given the novelty of the issues that social media presents in the realm of securities law, legislative and judicial bodies have yet to grapple with them in depth in Canada. This paper seeks to fill a gap in the literature by tackling the topic of investor protection in the context of “finfluencing.” Specifically, this paper will explore the question of whether Canadian securities regulators, with a particular focus on the Ontario Securities Commission, should further regulate finfluencers and investment “advice” on social media. Social media includes platforms such as Tik Tok, Instagram, Facebook, Twitter, and Reddit.

Part I of this paper will provide an overview of the problem. Part II will survey the current regulatory landscape in Canada as well as the United States, the United Kingdom, and Australia. Part III will delve into regulatory gaps in the Canadian regime and consider possible reforms to address such gaps. Finally, Part IV will highlight the enforcement challenges that regulators must consider as they develop regulations moving forward.

PART I: PROBLEM OVERVIEW

The COVID-19 pandemic sparked a rise in Generation Y and Generation Z retail investors.⁹ These generations are comfortable with technology and well-connected on social networking platforms, which give market participants access to vast amounts of both information and disinformation.¹⁰ The unprecedented rate at which information is disseminated and consumed invites questions regarding its accuracy and reliability and, in turn, the dangers it poses to investors. Finfluencers are one vehicle for distributing information, and some even characterize them as information brokers.¹¹ The problem that finfluencers pose for regulators is multifaceted, with three main concerns surfacing in recent years: 1) the proliferation of investment “advice” by finfluencers; 2) promotional activities undertaken without proper disclosure by finfluencers; and 3) increased opportunities for market manipulation. These challenges illustrate the complex relationship between social media and capital markets and the need for regulatory reform.

1. Finfluencers and Investment “Advice”

Many finfluencers on social media platforms provide general investment advice, as opposed to personalized advice based on an individual’s unique financial objectives, including advice on which stocks to invest in.¹² Finfluencers possess the ability to influence investing decisions by virtue of the size of their platform, and retail investors, some of whom do not possess sophisticated investing knowledge, are particularly vulnerable to financial harm upon exposure to finfluencer content. Such content also tends to suffer from survivorship bias, which amplifies successes and excludes failures, and consequently lacks transparency and distorts facts and statistics, making success seem more probable than it is.¹³ This information asymmetry leads individuals to make investment decisions without an informed assessment of the risk-reward trade-off.¹⁴

In 2022, multiple celebrities came under severe scrutiny for publicly backing crypto assets. For example, Tom Brady, along with many other celebrities, was featured in advertisements for FTX Trading Ltd. (“FTX”), a crypto trading platform.¹⁵ These advertisements promised that FTX was a secure place for investors to park their money and earn an 8% interest rate.¹⁶ However, in early November 2022, information came to light that FTX had mismanaged user funds, which led to a virtual bank run and consequently, FTX filing for Chapter 11 bankruptcy.¹⁷ Investors who claimed they had been convinced by celebrity sponsors to deposit their funds in FTX lost millions of dollars, with some losing their life savings.¹⁸ Brady is among several celebrities being sued in a class action lawsuit alleging that they promoted the sale of unregistered securities in the form of FTX interest-bearing accounts.¹⁹

Finfluencing does not require overt displays of endorsement, as markets may respond to seemingly innocuous comments and actions of prolific figures. For example, when Elon Musk tweeted “GameStonk!!” on January 26, 2021, GameStop Corp.’s (“GameStop”) stock price soared from roughly $144 before his tweet to nearly $348 the next day.²⁰

2. Finfluencers and Promotional Activities

Finfluencers often receive compensation for promoting certain products and services; however, problems arise when they do not disclose that their promotions are incentivized. For example, in October 2022, the U.S. Securities and Exchange Commission (“SEC”) announced charges against Kim Kardashian for promoting a crypto asset security offered and sold by EthereumMax on her Instagram account without disclosing the $250,000 payment she received for the promotion.²¹ The post contained a link to the EthereumMax website which provided instructions on how to purchase EMAX tokens. Kardashian settled the charges by paying $1.26 million in penalties, disgorgement, and interest.²² The SEC order found that Kardashian’s post and lack of disclosure violated anti-touting provisions of U.S. securities laws.²³ Such disclosures are crucial to level the playing field for retail investors who cannot make informed investment decisions if they are not aware of the motivations underlying the promotion of a security.

3. Market Manipulation

Social media platforms have decentralized the production and consumption of information and thus, have fostered broader and faster transmission of market-moving information and opinions.²⁴ In turn, some finfluencers are empowered to take advantage of retail investors and coordinate market manipulation schemes to generate significant profits. Market manipulation typically occurs when an individual artificially affects the supply or demand for a security.²⁵ For example, in December 2022, the SEC charged eight individuals with fraud and stock manipulation involving exchange-traded stocks. ²⁶ Seven of those charged were social media influencers who used Discord and Twitter to carry out the scheme, where they amassed hundreds of thousands of followers.²⁷ The defendants purchased certain stocks and encouraged their large social media following to do the same by posting price targets and indicating that they were buying, holding, or adding to their stock positions; however, when the share prices and/or trading volumes rose for the promoted stocks, the defendants would sell their shares (without disclosing their plans to sell the securities while they were initially promoting them).²⁸ In turn, the stock prices would decline and their followers suffered losses.²⁹ Over the course of the fraud, the defendants reaped profits exceeding $100 million.³⁰ To hide this pump and dump scheme from their followers, the finfluencers would delete old social media posts and lie to explain the decline in prices; but in reality, they were profiting at their followers’ expense.³¹

Market manipulation is not always orchestrated by a select few. Ordinary retail investors have banded together to drive stock prices as well. The frenzy that saw the shares of GameStop soar from less than 5 USD per share at the beginning of January 2021 to over 300 USD at the end of the month can be attributed to a “short squeeze” coordinated among retail investors on a Reddit forum called “WallStreetBets”.³² In mid-2019, Reddit user Keith Gill began posting regularly about a $53,000 investment he made into GameStop.³³ Over time, his posts gained traction and other Reddit users began fervently following his posts and investing in GameStop as well.³⁴ Gill and a small crew of supporters made numerous Reddit posts and inspired hordes of online traders to purchase options contracts in GameStop, taking a contrary stance to sophisticated hedge funds who had taken a large short position on the stock.³⁵ Their collective actions drove the price of the stock up by 1,600% over the month of January in 2021 and caused the large Wall Street firms who bet the stock would go down to lose billions of dollars.³⁶ The SEC commented on these events, noting that “extreme stock price volatility has the potential to expose investors to rapid and severe losses and undermine market confidence.”³⁷ Dramatic fluctuations in stocks can also trigger a range of feelings in investors, including the fear of missing out, which makes them more vulnerable to bias when making investments and more likely to be trapped by market manipulation schemes.³⁸

PART II: THE REGULATORY LANDSCAPE

To better understand the regulatory framework governing the nexus between social media and securities law, a discussion of the legal frameworks in Canada, the United States, the United Kingdom, and Australia is warranted.

1. Canadian Regulatory Scheme

The Canadian securities regulatory regime operates to protect investors from unfair, improper, or fraudulent practices.³⁹ There are three components of the regime that are particularly relevant to the regulation of finfluencers: registration requirements, disclosure requirements, and anti-market manipulation provisions.

A. Registration Requirements for Investment Advisers

The Canadian registration regime protects investors by ensuring that market intermediaries such as investment advisers are properly qualified and subject to the appropriate regulations.⁴⁰ The Ontario Securities Act defines an adviser as “a person or company engaging in or holding themselves or itself out as engaging in the business of advising others as to the investing in or the buying or selling of securities.”⁴¹ Furthermore, the Securities Act stipulates that unless a person or company is exempt under provincial securities law, they shall not engage in the business of or hold themselves out to be engaging in “the business of, advising anyone with respect to investing in, buying or selling securities” unless the person or company is registered in accordance with the law as an adviser.⁴² This is also known as the ‘business trigger’ for registration. Factors considered in determining whether a firm or individual is advising in securities for a business purpose include a) engaging in activities similar to a registrant; b) intermediating trades or acting as a market maker; c) directly or indirectly carrying on the activity with repetition, regularity or continuity; d) being, or expecting to be, remunerated or compensated; and e) directly or indirectly soliciting securities transactions or offering advice.⁴³

In order to register or maintain registration, individuals must meet three criteria: proficiency, integrity, and solvency.⁴⁴ The proficiency criterion requires individual applicants to demonstrate that they have the appropriate education, training, and experience to perform the activity properly.⁴⁵ The integrity requirement demands that registered individuals conduct themselves with integrity and honesty by, for example, disclosing conflicts of interest.⁴⁶ The solvency requirement involves an assessment of the overall financial condition of an individual, as advisers must meet certain capital requirements and maintain insurance.⁴⁷

Finfluencers are typically not captured by registration requirements, and this is likely due to section 8.25(2) of National Instrument 31-103 and section 34(1) of the Ontario Securities Act. These sections exempt advisers from registration requirements even if they hold themselves out as engaging in the business of providing advice, either directly or through publications or other media, that are “not purported to be tailored to the needs of anyone receiving the advice.”⁴⁸ The nature of the information and “advice” that social media finfluencers propagate is neither tailored nor specific; rather, it contains general opinions and stories about personal experiences that are distributed to the masses.

B. Disclosure Requirements for Investment Advisers

In November 2018, the Canadian Securities Administrators (“CSA”) issued a notice about the rise in issuers engaging in “problematic promotional activity” by compensating third parties “who use social media and general investing blogs to promote issuers, but do not disclose their agency, compensation and/or financial interest.”⁴⁹ These activities may produce information that is unsubstantiated or unbalanced and lead to an artificial increase in a share issuer’s price and trading volume, thus posing a significant risk to investors who may be misled and subsequently suffer financial harm.⁵⁰

Concerns regarding promotional activities on social media have been on the CSA’s radar for years, but it wasn’t until May 2021 that the British Columbia Securities Commission (“BCSC”) published the proposed British Columbia Instrument 51-519 which would establish disclosure rules pertaining to promotional activity.⁵¹ Specifically, section 6 outlines that when a person or a company conducts promotional activity, they would be required to disclose certain information, including the following: a) the name of any person or company for which they have been retained to conduct the promotional activity; b) if they received or may receive compensation for the promotional activity and a description of the provider, nature, and amount of compensation; c) whether they beneficially own or control a security, or a related financial instrument of or in respect of a security, that is the subject of the promotional activity; d) whether the person or company has an intention to acquire or dispose of a security that is the subject of the promotional activity; e) any platform or other medium on or through which the promotional activity will occur; and f) a description of any conflict of interest arising from or related to the activity.⁵² A person or company that arranges for another person or company to conduct promotional activities is also responsible for ensuring that the activities are in compliance with section 6.⁵³ Although the proposed instrument has not come into force, the BCSC has taken action against undisclosed online paid promotional activities by relying on sections 52(2) and 168.2(1) of the BC Securities Act, which deal with disclosure of investor relations activities and contraventions attributable to employees, officers, directors and agents, respectively.⁵⁴

C. Market Manipulation

As previously mentioned, social media has become a popular tool to disseminate information and artificially alter share prices for personal gain.⁵⁵ National Instrument 23-101 and provincial securities laws address market manipulation and fraud.⁵⁶ These laws state that a person must not engage in transactions that contribute to a misleading appearance of trading activity and/or artificial price for a security or derivative.⁵⁷ Two types of market manipulation that legislation tries to curb are “pump and dump” and “short and distort.”

i. Pump and Dump

Pump and dump schemes involve fraudsters who disseminate false and/or misleading information to “pump” up the price of a stock and then proceed to “dump” or sell their own shares of the stock at the inflated price.⁵⁸ Upon dumping the stock and ceasing its promotion, the stock price typically falls and investors who were misled into purchasing the stock during the “pump” phase lose money.⁵⁹ Canada has laws that prohibit pump and dump schemes. For example, the Ontario Securities Act stipulates that it is unlawful for a person or company to take actions that result in or contribute to a misleading appearance of trading activity or an artificial price for a security, or perpetrate a fraud.⁶⁰ It also states that a person or company shall not make a statement that is misleading or untrue or would reasonably be expected to impact the price and value of securities.⁶¹ Continuous disclosure obligations for issuers, which are set out in National Instrument 51-201, also help provide timely and accurate information to investors,⁶² thus helping prevent pump and dump schemes by ensuring that investors are properly informed.

ii. Short and Distort

In December 2020, the CSA published a consultation paper on activist short selling, which occurs when an individual takes a short position in a security and then publicly shares information that is likely to negatively impact the share’s price.⁶³ If the value of the share price declines, the short seller realizes a profit (as they are able to repurchase the shares they initially shorted at a lower price).⁶⁴ There are two types of activist short selling. In the first case, an individual provides material and accurate information disclosure about issuers which helps improve market efficiency and reflect the true underlying value of the issuer’s security. In the second case, an individual provides false and misleading information that distorts prices and harms the integrity of capital markets.⁶⁵ The latter case is referred to as a short and distort campaign.⁶⁶ If an activist short seller can convince the market of their thesis, they will successfully trigger a decline in the target issuer’s share price and cause losses to investors.⁶⁷

Activist short sellers are subject to existing prohibitions such as those related to market manipulation.⁶⁸ In addition, “a person who places an order for the sale of a security with a registered dealer must declare at the time of placing the order if they do not own the security (i.e., are trading using borrowed securities), and market participants wishing to engage in short selling must have a reasonable expectation of settling any trade that would result from the execution of a short sale order.⁶⁹ However, most Canadian provinces do not subject activist short sellers to specific regulatory requirements.⁷⁰

The Investment Industry Regulatory Organization of Canada (“IIROC”) monitors for potential abusive trading activity through a detailed reporting regime.⁷¹ The reporting obligations include a requirement to mark all orders representing a short sale as either “short” or “short-marking exempt;” a requirement to disclose “Extended Failed Trades;” and a requirement that if an Extended Failed Trade report is filed with IIROC, further short sales generally cannot be made by that market participant or by an access person without prior arrangements to borrow the securities necessary for settlement.⁷² IIROC also has the power to designate a security as a Short Sale Ineligible Security.⁷³ Registered dealers are required to report the aggregate short position of each individual account twice a month to IIROC, and IIROC aggregates and consolidates trades marked “short sale” from all of the marketplaces it monitors and publishes a semi-monthly report illustrating the total industry short sales for each security over the reporting period.⁷⁴ In contrast to the U.K., there are no reporting requirements or obligations to disclose information on the short position of an individual account to IIROC or the public.⁷⁵

Unlike the U.S., Canada permits “naked” short selling (the investor is not required to pre-borrow the securities necessary for settlement), and Canada has not reinstated a modified version of the “uptick” rule, which effectively stops short selling when a share price declines past an impermissible level over a specific period of time.⁷⁶

2. U.S. Regulatory Scheme

While the U.S. securities regime shares many similarities with the Canadian regime, there are important elements that differ and make U.S. securities regulation more responsive to the challenges presented by social media. These differences are outlined in this section.

A. Registration and Disclosure Requirements for Investment Advisers

The U.S. has legislation requiring investment advisors to register and make appropriate disclosures. Under the U.S. Investment Advisers Act of 1940, an individual is considered an investment adviser if they are engaging in the business of providing advice to others or issuing reports or analyses regarding securities for compensation.⁷⁷ All investment advisers are required to register either with the SEC or a state regulatory agency.⁷⁸ Advisers are also required to disclose any conflicts of interest to their clients.⁷⁹ Similar to the Canadian regulatory regime, finfluencers that only provide impersonal advice (i.e., advice not tailored to the individual needs of a specific client) may be exempt from registering as an “adviser” and qualify as “publishers.” The U.S. Supreme Court has confirmed that the legislation does not intend to catch general advice.⁸⁰ Where the U.S. regulatory regime differs is that it contains legislative provisions that apply to the conduct of finfluencers with respect to promotional activities. Even if finfluencers do not qualify as investment advisors, the U.S. Securities Act of 1933 states that it is unlawful for any person, using any means or instruments of communication, to promote securities without disclosing whether consideration for such promotion was or will be received and the amount thereof.⁸¹ This is also known as anti-touting regulation.⁸²

B. Market Manipulation

Similar to the Canadian legislative scheme, the U.S. Securities Exchange Act of 1934 (“Securities Exchange Act”) contains provisions that make it unlawful to artificially impact the supply or demand for a security by, for example, spreading false or misleading information about a company, engaging in a series of transactions to fabricate trading activity, and rigging quotes, prices, or trades to exaggerate or depress the apparent demand for a security.⁸³ Moreover, the U.S. Securities Exchange Act also contains anti-fraud provisions which condemn individuals from making misleading statements and engaging in manipulation or deception “in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”⁸⁴ The reporting requirement in the U.S. that applies to short positions is also similar to Canada, as brokers are required to report, on a semi-monthly basis, gross short positions, the statistics of which are then published by the Financial Industry Regulatory Authority twice a month.⁸⁵ Where the U.S. differs from Canada, however, is that the U.S. prohibits naked short selling and imposes an uptick rule.⁸⁶

3. U.K. and Australian Regulatory Schemes

The U.K. and Australian securities regimes differ from the Canada’s in some respects. The differences that are important to understanding the gaps in the Canadian regulatory framework are outlined in this section.

A. Registration Requirements in Australia

The Australian Corporations Act 2001 (“Corporations Act”) uses broad definitions for terms related to the provision of financial “advice.” Specifically, an investment adviser is a person who provides a financial service if they provide financial product advice.⁸⁷ Financial product advice is defined as a recommendation or a statement of opinion that is either a) intended to influence person(s) in making a decision in relation to a particular financial product or class of financial products; or b) could reasonably be regarded as intending to have such an influence.⁸⁸ Financial product advice includes both personal advice that is uniquely tailored to individuals, and general advice.⁸⁹ These definitions are broad enough to capture a range of activities, including the type of “advice” that finfluencers convey to their social media following.

Registration and licensing requirements are imposed on individuals who are carrying on a financial services business.⁹⁰ Individuals who carry on such a business must hold an Australian financial services license covering the provision of financial services.⁹¹ The indicia of a business being carried on has been outlined by Australian courts to include a) a commercial enterprise, b) a system and/or repetition, and c) a profit motive.⁹² The Australian Corporations Act broadens this definition by explicitly stating that a business can be carried on “otherwise than for profit.”⁹³

There are exceptions related to providing general advice that can exempt an individual from the requirement to possess an Australian financial services license. The exemption relevant to general advice provided on social media is as follows: the service is the provision of general advice and a) the advice is provided by means of transmissions that the person makes through an information service, b) the transmissions are generally available to the public, and c) the sole or principal purpose of the transmissions is not the provision of financial product advice.⁹⁴

The Federal Court of Australia (“FCA”) recently considered a case about whether a finfluencer carried on a financial services business and if the exemption outlined previously applied.⁹⁵ There, the defendant, Tyson Scholz, operated an Instagram account on which he published posts and “stories”⁹⁶ that contained information about his success in trading on the Australian Stock Exchange.⁹⁷ He also held educational seminars and offered to provide private tips for a fee. Each of these actions was considered by the FCA.

Scholz, who had amassed 21,900 followers on his Instagram profile,⁹⁸ posted stories on his account about shares in particular companies, and while these stories were free to read and were not a direct recommendation to acquire the mentioned shares, the FCA noted that the likely consequence of the stories was that they would influence viewers to acquire the shares in question, thus increasing Scholz’s shareholding value (effectively carrying out a pump and dump scheme).⁹⁹ The FCA decided that it was irrelevant that Scholz’s stories did not contain explicit encouragement to purchase specific shares, as the posts were made in a way that indicated that he liked the company in question and it was clear that the posts were intended to influence or were reasonably capable of being regarded as intended to influence persons in making a decision in relation to a financial product (i.e., the stocks referred to in his stories).¹⁰⁰

Eventually, Scholz began to hold educational seminars, both in person and on Zoom, on how to trade shares.¹⁰¹ He advertised the seminars on his Instagram and charged attendees 500 AUD.¹⁰² The evidence established that during the seminars, Scholz expressed opinions about particular companies and his statements were reasonably capable of being regarded as intended to influence persons in making a decision in relation to a particular financial product.¹⁰³

Scholz also began to accept payments of 500 AUD to privately provide trading tips about specific stocks using messaging functions on social media platforms, as well as a 1,000 AUD fee to add individuals to a group chat on a platform called Discord, where he provided advice on which shares to trade.¹⁰⁴ With respect to the private individual tips, while there was insufficient evidence of the communications, the FCA noted that it is unlikely that an individual would pay $500 AUD for a generic tip (in other words, the advice was likely financial product advice as opposed to generic trading guidance).¹⁰⁵ With respect to the Discord channel run by Scholz, there was ample evidence that Scholz expressed opinions and made recommendations about particular shares.¹⁰⁶ The content of the messages made it clear that Scholz intended his various messages to be relied on by the recipients and influence their decision-making.¹⁰⁷

The FCA determined that through his social media channels, Scholz was carrying on a financial services business as it had many features of a commercial enterprise, and the financial product advice given by Scholz was integral to the business and part of a continuous and systemic operation through which Scholz derived profit.¹⁰⁸ Scholz claimed that even if he carried on a financial services business, his advice was general and he would be exempt from the requirement to obtain a financial services license.¹⁰⁹ The FCA found that the advice provided was general and proceeded to analyze the exemption requirements.¹¹⁰

The FCA stated that the first requirement, that the advice was delivered by way of a transmission service, was met as the advice given through Instagram, Zoom, and Discord qualify as transmissions made by means of an information service provided by the Internet.¹¹¹ With respect to the requirement that the transmissions be generally accessible to the public, the FCA found that while almost all of his transmissions via Instagram, group chats, and Zoom seminars were accessible by the public, the private messages that Scholz sent to individuals were not.¹¹² Therefore, the second requirement for the exemption was not met. Regarding the third requirement that the sole or principal purpose of the transmission must not be to provide financial product advice, Scholz’s Instagram account (which also contained various personal lifestyle posts) and his Zoom seminars (which also provided educational information) were not used for the sole or principal purpose of providing financial product advice, but his Discord channel was.¹¹³ Hence, the third requirement was also not met. Based on the analysis, Scholz was found to be in contravention of the Corporations Act and was required to hold an Australian financial services license for the purpose of carrying on his financial services business.¹¹⁴ ASIC v Scholz illustrates that the inclusion of general advice in the definition of financial product advice, even with exemptions in place, can capture serious instances of misconduct where finfluencers exploit their platform to influence the decisions of retail investors.

B. Market Manipulation Reporting Regime in the U.K.

In the U.K., market manipulation is governed by the “Market Abuse Regulation”.¹¹⁵ Short selling specifically is regulated under the “Short Selling Regulation”, where transparency provisions pertaining to short positions are more detailed than those required in Canada and the U.S.¹¹⁶ Specifically, legal persons must report their net short position to the U.K.’s Financial Conduct Authority where the position constitutes 0.2% of the issued share capital of a company and each 0.1% above that.¹¹⁷ If the position constitutes 0.5% of the issued share capital of a company, then legal persons must publicly disclose to the market their net short position as well as incremental 0.1% changes above that threshold.¹¹⁸ This information gets published on the U.K. Financial Conduct Authority’s website and includes the name of the position holder, the name of the company in which the net short position is held, and the size of the net short position expressed as a percentage of issued share capital.¹¹⁹ This means that information regarding individual accounts is publicly available. The objective of these disclosure requirements is to provide greater transparency on how short selling impacts the price of securities.¹²⁰

PART III: FILLING THE REGULATORY GAPS

The current regulatory regime in Canada is inadequate to deal with the challenges that social media presents. However, an international comparative analysis provides guidance on how Canadian regulators can begin charting a new path forward.

1. Impose Registration Requirements for Finfluencers

At present, finfluencers in Ontario are not required to register as investment advisors, and this is primarily due to the legislative exemption in section 34 of the Ontario Securities Act which stipulates that registration is not required if the financial advice is not tailored to the recipient’s needs.¹²¹ However, this was not always the case. In the past, prior to this exemption being added to the Ontario Securities Act, Ontario courts recognized general advice as constituting financial advice.¹²² Given that social media has made financial “advising” more ubiquitous, retail investors are at greater risk of harm. Lawmakers should revisit the definition of financial advice and consider expanding it to include general advice. The Australian registration regime provides a strong example of how legislation can incorporate general advice into the definition of financial advice, while still including exemptions to ensure that balanced information is permitted and accessible to investors. However, the exemption analyzed in ASIC v Scholz demonstrates that certain requirements, specifically the “sole or principal purpose” requirement, can be circumvented by simply ensuring that one’s social media platform contains other types of content. If Canadian authorities were to implement a similar exemption, it would be important to consider whether such requirements can be interpreted in a manner that would undermine the effectiveness of the legislation.

2. Implement Anti-Touting Regulations

As it stands, British Columbia is the only province to propose legislation that functions similarly to the anti-touting laws used in the U.S. Anti-touting regulations have successfully enabled the SEC to bring charges against individuals who promote financial products without disclosing the consideration they received in exchange for the promotion.¹²³ Canadian regulators need to take further steps to protect investors from biased recommendations by finfluencers by implementing similar legislation to the proposed British Columbia Instrument 51-519, which is more comprehensive than U.S. anti-touting laws, and such legislation should be harmonized nationally. The BCSC instrument promotes transparency and equips investors with the information they need to make informed decisions.

3. Increase Transparency in Short Selling Positions

While pump and dump schemes are illegal, the topic of regulating activist short selling has emerged at the forefront of regulatory reform considerations as social media has made it easier to carry out short and distort campaigns.¹²⁴ However, ideas on how to address the problem are contentious. Canada takes the most lenient regulatory approach to short selling compared to the U.S., U.K., and Australia. Different countries have different markets, and it is important to consider these differences in regulatory reform. For example, the number of Canadian issuers targeted by activist short seller campaigns annually is less than 1%, whereas this number exceeds 3% of all U.S. issuers and is less than 0.5% of issuers in Australia.¹²⁵ Given that activist short selling is less prevalent in Canada relative to other jurisdictions, increased regulation may not be justified.

The U.K. currently has the strongest transparency requirements, given that its short selling reporting regime publicly discloses information about individual short positions. While Canadian regulatory authorities could consider implementing similar transparency requirements, critics point out a number of problems with such a framework; in fact, even the U.K. government is seeking views on the purpose and value of the current public disclosure framework for short positions as they consider regulatory reforms.¹²⁶ One issue that has been raised is that the framework potentially discourages market participants from holding larger net short positions as they may not wish to be identified to the public and compromise their strategies.¹²⁷ Public identification could also make participants vulnerable to short squeezes from other investors and lead to herding behaviour. This, in turn, could adversely impact market liquidity and the price discovery process, and cause severe market volatility.¹²⁸ Public disclosure also increases exposure to litigation, regulatory action and reputational costs.¹²⁹ The criticisms of the U.K. scheme raise questions about whether enhanced reporting requirements would harm or benefit Canada. From an investor protection standpoint, it is important that investors are well informed. Although enhanced transparency may have some negative impacts, providing investors with reliable information through increased reporting and empowering them to take advantage of it through public education campaigns could justify such measures. Of course, given the competing views on this issue, it is crucial that regulators continue to consult with stakeholders to tailor the framework to Canada. The alternatives, such as implementing a modified uptick rule and more stringent pre-borrowing conditions to prevent naked short selling, also require more data to determine their suitability for Canadian markets.¹³⁰

4. The Risk of Over-Regulating

New retail investors are typically characterized as being uninformed and vulnerable;¹³¹ however, they are often sophisticated in their ability to perform due diligence and scrutinize information to discern what is reliable. Therefore, it is important that regulators avoid over-regulating in the name of protecting investors and in turn, create barriers that prevent retail investors from participating in capital markets at all. For example, in 2020, investors were enthusiastically purchasing shares in Hertz Global Holdings (“Hertz”) despite it declaring bankruptcy, and Hertz sought to issue new shares to take advantage of this trend; however questioning by the SEC deterred Hertz from doing so.¹³² While the SEC was praised for taking action to protect retail investors from purchasing worthless shares, Hertz emerged from bankruptcy and generated shareholder value. In other words, the retail investors had predicted their gains correctly but were blocked from acting on their predictions due to regulatory intervention.¹³³ When designing regulatory reforms, it is important that in addition to consulting institutional stakeholders, regulators should also involve retail investors through consultations with the public and investor rights advocacy organizations such as FAIR Canada.

PART IV: ENFORCEMENT CHALLENGES

Regulating finfluencers comes with several enforcement challenges that can undermine the effectiveness of regulatory reform. A discussion of some of the main challenges follows.

1. Online Anonymity

While goal of this paper is not to delve into the mechanics of privacy law and the investigative powers of regulatory authorities, it is important to note that many social media users employ pseudonyms to remain anonymous. Therefore, even if a regulator sought to charge a finfluencer for perpetuating legal advice without a license or touting financial products without appropriate disclosure, it may be difficult to do so if the identity of the user is concealed. The Ontario Securities Act empowers the Ontario Securities Commission to investigate matters related to the administration of securities law and regulation of capital markets and seek a court order to inquire into the conduct and affairs of an individual.¹³⁴ While these powers are broad and could apply to personal information stored on social media platforms, a finfluencer could obscure any relevant information that a regulator would need to enforce legal action.

2. Freedom of Expression

Freedom of expression is enshrined in the Canadian constitution and is thus afforded the highest level of legal protection.¹³⁵ In the context of finfluencing, regulators must consider the fine distinction that exists between providing education and providing investment advice. For example, it is difficult to determine if a comment such as “I like the stock” qualifies as investment advice and if censoring it would amount to censoring valid expression. This judgement call becomes even more complex if the opinion is expressed in an educational context.

The GameStop phenomenon also highlighted a new trend: expressive trading.¹³⁶ An expressive trader “does not trade for profit but rather to send a political message or produce a social or aesthetic effect.”¹³⁷ Social media has empowered retail investors to engage in expressive trading because it allows them to coordinate their trading to deliver their desired message in the form of a measurable impact on the targeted stock’s price.¹³⁸ For expressive GameStop traders, one motivating theme was protesting Wall Street elitism.¹³⁹ It is possible that in the future, expressive trading could be a way to protest other issues such as labour practices, lack of board diversity, controversial products, advertising, etc.¹⁴⁰ Regulators will also have to grapple with whether censoring finfluencers who provide trading directions for the purpose of engaging in expressive trading is a violation of freedom of expression.

3. Disclaimers

Another enforcement challenge is whether disclaimers such as “this is not financial advice” could shield a finfluencer from liability for harm that results from reliance on their advice. The common law provides some guidance on the effectiveness of disclaimers. When a plaintiff has suffered harm due to their reliance on representations made by a defendant who provided a disclaimer, the court often evaluates the disclaimer against the backdrop of contract law or tort law.¹⁴¹ Given that a contractual relationship typically does not exist between a finfluencer and a follower, the relevant analysis relates to how disclaimers function in tort. Courts have determined that even where there is no contractual relationship, if a party makes representations and reasonably expects the other party to rely on them, a duty of care arises.¹⁴² However, the party making the representations is able to disclaim any assumption of a duty of care, and if the other party chooses to rely on the representations anyways, they cannot disregard the explicit terms on which those representations were made.¹⁴³ Therefore, disclaimers can validly repudiate one’s duties under the common law. However, such disclaimers would not function in the face of statutory provisions that explicitly eliminate their power. Hence, regulators should consider whether it would be desirable from a practical perspective and policy perspective to incorporate legislative provisions that prohibit disclaimers shielding finfluencers from liability.

4. Territorial Link

Even if regulators were to implement reforms to hold finfluencers accountable for the content they produce, another challenge they will have to grapple with is defining who the reforms apply to. Finfluencers are located across the world, and if regulatory authorities maintain the “carrying on business” element in the current definition of providing financial advice, they may have to determine how to define “carrying on business in Canada” specifically. The territorial element of carrying on business in Canada is defined in tax law. For GST/HST purposes, several factors help determine whether a business is carried on in Canada, including the place of delivery and the place of payment.¹⁴⁴ In the Income Tax Act, a physical presence in Canada is required.¹⁴⁵ Given that finfluencers may have a digital presence (as opposed to a physical presence) in Canada, the test for territorial link may need to be different from what is articulated in tax law.

CONCLUSION

While the emergence of finfluencers has helped democratize finance, it has also brought into question whether Canada’s legislative framework adequately protects retail investors. The novel challenges that social media presents in the realm of securities law calls for a re-evaluation of the current regime governing the registration of investment advisers, disclosure requirements for promotional activities, and market manipulation. Keeping in mind that one of the objectives of securities law is investor protection, it is crucial that regulators put accountability and transparency at the forefront of their considerations as they explore opportunities for reform, especially when assessing solutions that have been adopted in other jurisdictions. Centralizing the protection of investors in the development of securities law will allow Canada’s regulatory bodies to keep pace with the increasingly complex task of maintaining the integrity of its capital markets and create an environment where all market participants can thrive.

Table of Authorities

LEGISLATION: CANADA

British Columbia Securities Commission, “51-519 – Promotional Activity Disclosure Requirements” (26 May 2021).

“Canadian Charter of Rights and Freedoms”, Part 1 of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (UK), 1982, c 11.

“Companion Policy 23-101CP Trading Rules” (10 April 2017).

“Companion Policy 31-103CP Registration Requirements, Exemptions and Ongoing Registrant Obligations” (6 June 2022).

“National Instrument 23-101 Trading Rules” (10 April 2017).

“National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations” (6 June 2022).

“National Instrument 51-102 Continuous Disclosure Obligations” (12 June 2018).

Securities Act, R.S.B.C. 1996, c. 418

Securities Act, R.S.O 1990, c. S.5.

LEGISLATION: FOREIGN

Corporations Act 2001 (Cth), 2001/50.

EU, “Regulation 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps”, [2012] OJ, L 86/1.

EU, “Regulation 596/2014 of the European Parliament and of the Council of 16 April 2014 on on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC”.

“The Market Abuse (Amendment) (EU Exit) Regulations 2019” (UK).

Investment Advisers Act, 15 USC (1940).

Securities Exchange Act, 15 USC (1934).

JURISPRUDENCE: CANADA

BG Checo International Ltd. v British Columbia Hydro & Power Authority, [1993] 1 SCR 12, 1993 CarswellBC 10.

Central Trust Co. v Rafuse, [1986] 2 SCR 147, 1986 CarswellNS 135.

Re Costello, 2004 Carswell Ont 2902, [2004] O.J. No. 2972 (ON Sup Ct J Div Ct).

JURISPRUDENCE: FOREIGN

Australian Securities and Investments Commission v Scholz (No 2) [2022] FCA 1542.

Hope v Bathurst City Council (1980) 144 CLR 1 at 8-9.

Hyde v Sullivan, (1955) 56 SR (NSW) 113.

Lowe v SEC, 472 U.S. 181 (1985).

Luckins v Highway Motel (Carnarvon) Pty Ltd (1975) 133 CLR 164.

SECONDARY MATERIAL: REGULATORY NOTICES, STATEMENTS & PAPERS

Allison Herren Lee et al, “Statement of Acting Chair Lee and Commissioners Peirce, Roisman, and Crenshaw Regarding Recent Market Volatility” (29 January 2021), online: Securities and Exchange Commission.

Capital Markets Modernization Task Force, Final Report (2021) at 48.

CSA Consultation Paper 25-403, “Activist Short Selling” (3 December 2020), online (pdf): “Activist Short Selling”.

CSA Staff Notice 25-306, “Activist Short Selling Update” (8 December 2022), online (pdf): Canadian Securities Administrators.

Securities and Exchange Commission, Press Release, 2022-183, “SEC Charges Kim Kardashian for Unlawfully Touting Crypto Security” (3 October 2022), online: “SEC Charges Kim Kardashian”.

CSA Staff Notice 51-356, “Problematic Promotional Activities by Issuers” (29 November 2018), online (pdf).

European Securities and Markets Authority, “ESMA Report on Trends, Risks and Vulnerabilities” (no. 1), 2018, online (pdf): “ESMA Report”.

Financial Industry Regulatory Authority, “Short Interest Reporting” (2023), online.

IIROC Guidance Note 22-0130, “Guidance on Participant Obligations to have Reasonable Expectation to Settle any Trade Resulting from the Entry of a Short Sale Order” (17 August 2022), online: IIROC.

Securities and Exchange Commission, “Key Points About Regulation SHO” (2022), online: (for discussion of Rule 201).

Securities and Exchange Commission, Press Release, 2022-221, “SEC Charges Eight Social Media Influencers in $100 Million Stock Manipulation Scheme Promoted on Discord and Twitter” (14 December 2022), online: “SEC Charges Eight Social Media Influencers”.

Securities and Exchange Commission, Press Release, 2017-79, “SEC: Payments for Bullish Articles on Stocks Must Be Disclosed to Investors” (10 April 2017), online.

Securities and Exchange Commission, Press Release, 2023-34, “SEC Charges NBA Hall of Famer Paul Pierce for Unlawfully Touting and Making Misleading Statements about Crypto Security” (17 February 2023), online.

Securities and Exchange Commission, Press Release, 2023-59, “SEC Charges Crypto Entrepreneur Justin Sun and his Companies for Fraud and Other Securities Law Violations” (22 March 2023), online.

Securities and Exchange Commission SEC Division of Enforcement and SEC Office of Compliance Inspections and Examinations, “SEC Statement Urging Caution Around Celebrity Backed ICOs” (1 November 2017), online: Securities and Exchange Commission.

SECONDARY MATERIAL: JOURNALS & BOOKS

Anderson, John P., Jeremy Kidd & George A. Mocsary, “Social Media, Securities Markets, and the Phenomenon of Expressive Trading” (2022) 25:4 Lewis & Clark L Rev 1223.

Bliss, Barbara A., Peter Molk & Frank Partnoy, “Negative Activism” (2020) 97:5 Washington University L Rev 1333.

Boyd, Danah M. & Nicole B. Ellison, “Social Network Sites: Definition, History, and Scholarship” (2007) 13:1 J of Computer-Mediated Communication 210.

Condon, Mary G. et al, Securities Law in Canada: Cases and Commentary, 3^rd ed (Toronto: Emond Montgomery Publications, 2017).

Deng, Shuyuan et al, “The Interaction Between Microblog Sentiment and Stock Return: An Empirical Examination” (2018) 42:3 MIS Q 895.

Goanta, Catalina & Sofia Ranchordas, “The Regulation of Social Media Influencers: An Introduction” in Catalina Goanta & Sofia Ranchordas, eds, The Regulation of Social Media Influencers (Edward Elgar 2019).

Guan, Sue S., “The Rise of the Finfluencer” (2022) Forthcoming in NYU J of L and Business, online.

Lamont, Owen A., “Go Down Fighting: Short Sellers vs. Firms” (2012) 2:1 The Rev of Asset Pricing Studies 1.

Li, Jinyan, “Rethinking Canada’s Source Rules in the Age of Electronic Commerce: Part 1” (1999) 47:5 Can Tax J 1077.

Mitts, Joshua, “A Legal Perspective on Technology and the Capital Markets: Social Media, Short Activism and the Algorithmic Revolution” (Columbia Law and Economics Working Paper No. 615, 11 September 2019]), online.

Ramsay, Ian & Mihika Upadhyaya, “Carrying on Business in Australia” (2010) 48:6 Austl Bus L Rev 531.

Schulp, Jennifer J., “GameStop and the Rise of Retail Trading” (2021) 41:3 Cato Journal 511.

Tetlock, Paul C., “Giving Content to Investor Sentiment: The Role of Media in the Stock Market” (2007) 62:3 J Fin 1139.

SECONDARY MATERIAL: NEWS SOURCES

Alini, Erica “Financial advice is exploding on social media, but can you trust it?”, Global News (15 January 2022), online.

Banerji, Gunjan & Alexander Osipovich, “‘God Told Me to Put Money Into Hertz’: Small Investors Are Winning Big Again”, The Wall Street Journal (27 May 2021), online.

Contreras, Brian, “Have celebs learned their lesson from the FTX debacle?”, The Los Angeles Times (18 January 2023), online.

Davies, Rob, “GameStop: how Reddit amateurs took aim at Wall Street’s short-sellers”, The Guardian (28 January 2021), online.

Khan, Roomy, “Social Media Fueled Stock Market Trading: The Unsuspecting Need To Be Protected” (8 March 2021), online: Forbes.

Napolitano, Elizabeth & Brian Cheung, “The FTX collapse, explained”, NBC News (18 November 2022), online.

Popper, Nathaniel & Kellen Browning, “The ‘Roaring Kitty’ Rally: How a Reddit User and His Friends Roiled the Markets”, The New York Times (29 January 2021), online.

Tenbarge, Kat & Rob Wile, “SEC says social media influencers used Twitter and Discord to manipulate stocks”, NBC News (14 December 2022), online.

Zweig, Jason, “How the Stock Market Works Now: Elon Musk Tweets, Millions Buy”, The Wall Street Journal (12 February 2021), online.

SECONDARY MATERIAL: SOCIAL MEDIA POSTS

CEO Watchlist, “THANK THE RICH” (18 April 2021), online: TikTok.

Musk, Elon, “Gamestonk!!” (26 January 2021 at 16:08), online: Twitter.

Stock Dads, “5 stocks im buying March 2023. All stocks i currently trade or invest in. Do your own research!” (6 March 2023), online.

SECONDARY MATERIAL: OTHER

Allcot, Dawn, “Gen Z and Millennials Lead ‘Retail Investing’ Trend – Owning Up to 25% of the Stock Market” (14 December 2020), online: Yahoo Finance.

Anderson, John P., “GameStop, Social Media, and the Phenomenon of Expressive Trading” (24 March 2021), online (blog): The Columbia Law School Blue Sky Blog.

Canada Revenue Agency, Doing Business in Canada – GST/HST Information for Non-Residents (Guide RC4027).

Canadian Securities Administrators, “Are They Registered?”, online.

Davies Ward Phillips & Vineberg LLP, “Short Selling in Canada: A New Avenue for Investor Activism” in Governance Insights 2019 (Davies Ward Phillips & Vineberg LLP, 2019)

Mascianica, Scott et al, “Tout, Tout, Let It All Out: SEC Continues Crackdown on Celebs, Athletes Touting Digital Assets” (2 March 2023), online: Holland & Knight LLP.

North American Securities Administrators Association, “Informed Investor Advisory: Finfluencers” (August 2022), online.

Ontario Securities Commission, “Investor Protection”, online.

Picone, John M. et al, “Outlook 2021: Regulating Market Manipulation – Challenges and Change” (30 November 2021), online: Cassels Brock & Blackwell LLP.

Securities and Exchange Commission, “Market Manipulation”, online: Investor.gov.

See Securities and Exchange Commission, “Pump and Dump Schemes”, online: Investor.gov.

Thompson, Doretta, “Pay attention to these red flags before trusting a fin-fluencer” (2 October 2032), online: CPA Canada.

Urbani, Michael G., “British Columbia Securities Commission Proposes Rules to Require Disclosure of Promotional Activities” (14 June 2021), online: Stikeman Elliot LLP.

UK, Her Majesty’s Treasury, “Short Selling Regulation Overview: Call for Evidence” (December 2022), online (pdf).

Endnotes