Increase in Short Selling Activity
The securities watchdogs in Canada are teaming up to ascertain how much abusive short selling occurs in the capital markets of the country, sometimes to referred to as ‘short and distort.’ The sudden rise of the cannabis industry has invited this type of behaviour as the market took off faster than anyone expected, creating unfair valuations for companies on a massive scale.
Brian Kladko, the public affairs manager of British Columbia Securities Commission, said that the Canada Securities Administrators (CSA), which is an umbrella body, is in the preliminary stages of reviewing the extent and nature of abusive short selling prevalent in Canada’s capital markets.
Speaking for the CSA, Kladko asserted that they were in the information-gathering stage of the project.
The phenomenon has added a new dimension in the conflict between the growth seeking investors and the investors who borrow shares in the hopes that the prices would fall, helping them to gain from the difference.
It’s not just shorting the BCSC is cracking down on either.
Questionable Promotional Activities
This crackdown has come in the wake of another CSA notice on the dubious promotional activities deployed by various companies.
While the regulators did not comment further on the nature and focus of investigation of “short sellers”, they were clear and direct in their response to the promotional activities.
The questionable promotional activities are especially rampant in the emerging sectors such as cryptocurrency, cannabis, blockchain, and mining. The CSA notice made it unequivocally clear that its concerns went beyond the venture marketplace.
The CSA notice said that they would continue to monitor the promotional activities and that they would consider whether scope and extent of such activities required any enforcement regulatory or compliance action to protect the interests of investors and integrity of the capital markets.
The CSA is particularly averse to the promotional activities which are either completely untrue or are so highly imbalanced that they amount to misleading the investors. Although the CSA elaborated on some specific instances, they did not name anyone in this connection.
One of the common tactics employed by the promoters is changing the company’s name to reference an association with a hot emerging mineral or technology, such as cobalt or blockchain.
Other unfair strategies include announcement of positive events such as an acquisition of a business, followed by changing or cancellation of the transaction without the relevant announcement, and issuing numerous press releases which do not disclose any new facts.
Another trend which is particularly concerning for the regulatory authorities and which has huge potential to mislead is compensating third parties to use blogs and social media websites to undertake promotional activities on the behalf of companies without the disclosure of their financial interests or compensation received.
The regulators are increasingly monitoring the social media networks. The CSA is scrutinizing the social media posts describing early stage plans with great certainty and the posts making unsubstantiated assertions about the market growth or demand for a certain product.
Looking at the increasing vigilance of the regulatory authorities, it is clear that the noose is tightening around short sellers who abuse their positions and companies that undertake unfair promotional activities are going to be in trouble.