Securities regulators are flagging possible misconduct in the venture market involving companies that are issuing large blocks of securities to acquire assets at inflated valuations — a practice raising concerns about investor protection and market manipulation.
In a staff notice published Thursday, the Canadian Securities Administrators (CSA) outlined concerns about acquisitions in venture markets that may mislead investors and potentially represent market manipulation.
Specifically, the guidance focused on situations where an issuer distributes securities to “acquire assets or businesses that appear to have little or no actual value or operating history, and paying what appear to be significantly inflated prices.”
These types of deals could mislead investors, create a risk of investors acquiring securities at inflated valuations, and may amount to market manipulation — particularly if securities with pumped-up valuations are sold in the secondary market before the true value of an acquisition is disclosed.
“… We have seen valuations referenced in news releases or continuous disclosure documents that are often based on unreasonable or unsupportable assumptions, leading to an inflated price of the acquisition of a business or asset and therefore potentially misleading disclosure,” the regulators said.
In the notice, the CSA detailed its concerns and provided guidance to issuers on their regulatory obligations — including disclosure, accounting and financial reporting requirements — to guard against this type of misconduct.
The notice also warned issuers, along with their directors and officers, that they may face civil liability for misleading secondary market disclosure.
“Staff will continue to apply additional regulatory scrutiny to reporting issuers involved in acquisitions that appear to raise the concerns set out in this notice,” the regulators said, adding that this may lead to issuers being cease-traded, required to refile their disclosure, or face enforcement action.