September 10, 2014 Securities

Montréal - The Autorité des marchés financiers (AMF) is taking steps to crack down on the activities of issuers that could engage in abusive activities on the U.S. over-the-counter markets (also known as "OTC markets" or "Pink Sheets"). In doing so, the AMF seeks to protect investors, deter market manipulation and safeguard the reputation of Québec market participants.

The AMF is drawing on Regulation 51-105 respecting Issuers Quoted in the U.S. Over-the-Counter Markets, in force since July 31, 2012. Under this Regulation, all OTC issuers are required to file continuous disclosure documents with the AMF if they have a significant connection with Québec, including:

• business directed or administered in or from Québec (presence in Québec of a head office or executive office, residence or place of business of directors or officers);
• promotional activities conducted in or from Québec.

Two years after implementing this Regulation, the AMF, supported by its teams tasked with continuous disclosure and market supervision has:

• compiled a list of issuers active on U.S. OTC markets with a significant connection to Québec and contacted them to remind them of their obligations in this regard;
• identified 11 issuers who were compliant with the Regulation;
• issued cease trade orders against 23 issuers (pdf - 45 KB)This link will open in a new windowUpdated on September 10, 2014Regulation 51-105, Enforcement Record, Issuers under cease trade orders, prohibiting them from selling any securities.

The orders issued by the AMF are part of a more global set of measures taken by various regulators to mitigate market manipulation risk, in particular, those of the U.S. Securities and Exchange Commission, which, in February 2014, suspended the activities of 255 shell companies whose securities were trading on the marketplaces operated by OTC MarketsGroup.

Deterring market manipulation requires co-operation among regulators in multiple jurisdictions. This week, the AMF is hosting a seminar where over 100 participants from 10 countries and eight Canadian provinces are invited to share their expertise and build on their competencies related to market manipulation and insider trading issues.

As part of its daily activities, the AMF pursues its oversight and analysis efforts to identify issuers that could be engaged in market manipulation practices. In this way, it ensures that Québec is not a safe haven for fraudsters seeking to take advantage of investors' confidence in U.S. OTC markets.

OTC market fraud

U.S. OTC markets are often a haven for shell companies that can be used in market manipulation strategies. These thinly traded small-cap companies often do not file continuous disclosure documents that enable investors to assess the company's actual financial condition. The AMF encourages consumers to be cautious when investing in these markets where investments can be very risky. The availability and quality of the information at investors' disposal is highly variable and often fraudulent.

The classic strategy, known as a "pump and dump" scheme, consists in driving up trading volume and the value of the securities of these shell companies by touting their future value using misleading information, especially on discussion forums, social media and press releases. The scam artists behind this type of strategy wait for the ensuing market activity and inflated values to dump the securities they purchased at a low price and make a profit. Victims who have purchased the securities based on false or misleading information find out that their investments are worth very little or nothing at all.

The Autorité des marchés financiers is the regulatory and oversight body for Québec's financial sector.

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