The advertisements by some public companies in Canada have been targeted by a half-dozen securities regulators because they’re high on hype and low on disclosure.

The Canadian Securities Administrators announced in September that securities commissions in Alberta, Ontario, Quebec, Nova Scotia, New Brunswick and the Northwest Territories have noticed an increase in short promotional spots in all media for an unspecified number of smaller issuers featuring elements such as lots of music but little in the way of actual information about the issuers’ operations.

“We’re concerned about how investors might be reacting to these short, not very informative pieces, and whether [these ads] really give a good representation of what the company is about,” says Tom Graham, director of corporate finance with the Alberta Securities Commission. “On their own, they’re misleading because they only talk about the positive aspects [of the companies] and may omit other facts that may be relevant.”

The ads have been on national television channels, in newspapers and online. Graham declines to single out any company for its behaviour but he did say the firms in question were primarily junior companies listed on the TSX Venture Exchange.

“We’re not necessarily focusing on one industry; [the companies are] generally junior or smaller issuers. But there’s been enough of them that we think it’s prevalent,” Graham says, noting the CSA investigation has been going on for several months.

The regulators’ complaints centre on ads by junior resources companies in sectors such as mining or oil and gas. These spots focus on the companies’ stock symbols and short pieces of positive information in an effort to ensure they comply with rules about disclosure.

Len Terlinski, investigator with the Manitoba Securities Commission, says red flags were mainly being raised in the six participating jurisdictions: “It’s not as big an issue in Manitoba. But we spend a good chunk of our time looking at advertisements to see if they’re onside, even private ones on [websites such as] Kijiji.”

Such ads can circumvent basic regulatory requirements, such as the prospectus, which are designed to provide investors with full information about a company before they make an investment. An ad alone is no substitute, regulators say.

On the other hand, a punchy ad can send unsophisticated investors straight to the telephone, asking their advisor or broker to make a purchase. “Some advertisements are so abbreviated,” Terlinski says, “the idea behind them is to get people to invest based on the hype and without detailed information on the investment. It’s circumventing the disclosure rules.”@page_break@At first blush, it doesn’t appear as if anything intentionally untoward is being done. Terlinski says most companies, when informed of the perceived transgressions, apologize quickly and say they weren’t thinking along those lines.

“We view it as cautionary,” Terlinski says. “We’re protecting the market. In most cases, the issuers don’t even know what they’re doing is offside.”

On the other side of the divide, Graham says, some companies in the same sectors that don’t promote themselves in this way feel as if they’re being painted with the same brush. And as the CSA release says, the integrity of issuers as a whole is a concern.

“[The advertisements],” Graham says, “create an atmosphere of promotion and incomplete disclosure.”

Jim Baylis, spokesman for Vancouver-based Oniva Inter-national Service Corp. , a group of natural resources companies that includes Mill Bay Ventures Inc. and Coral Gold Resources Ltd. among its mining holdings, says Oniva makes a point of including information from news releases and public reports in its promotional material.

“Our advertisements are very bland, Baylis says. “They usually say that we operate in a certain area, we’re listed on a certain exchange and go visit our website.”

Baylis adds that he has no concerns about any of Oniva’s companies being seen in the same light as some of the offending companies in similar sectors.

“You can look back at our record,” he says. “If you always tell the truth, you never have to remember what you said. If you lie, you have to keep on lying. We stand behind everything we say.”

Graham says the regulators’ initial step is to encourage companies to stop these advertising practices. If they don’t, the authorities will be forced to consider whether the disclosure is misleading and what their next steps should be.

“We could take further action, if necessary,” Graham says, “through our enforcement channels. This is mainly a compliance effort.”

Any penalties handed out would be based on the specifics of individual cases. These penalties could range from small fines and cease-trading orders up to $1-million fines and lifetime bans on the high end.

Terlinski is quick to note that fraud isn’t the issue: “We’re talking about being offside on the rules regarding advertising. The risk to the investor is buying into the hype and buying an investment that isn’t suitable for them. Most junior mining companies are, by definition, risky.”

Terlinski agrees that investors who act on ads that are later proven to be misleading may have legal recourse if the investment goes off the rails. “Potentially, yes,” he says. “That would be an interesting investigation.” IE