Canadian businesses involved in the interactive digital media sector, including video games and augmented reality, should be aware of the implications of the Investment Canada Act and the Canadian government’s recent policy statements on their efforts to attract investment from foreign investors. The Canadian government’s focus on combating disinformation online extends to ensuring that foreign investment in Canadian businesses will not be injurious to Canada’s national security and/or will be of “net benefit” to Canada.

Combating disinformation online is a key priority of the current Canadian government. In late 2023 the government made a number of announcements with this focus, including:

• Global Declaration on Information Integrity Online. The Global Declaration establishes a set of high-level international commitments to serve as a framework and guide for governments to uphold information integrity online.
• Digital Citizen Initiative. Nearly $7 million in funding to support projects that increase digital media and civic literacy, help Canadians identify content created by artificial intelligence, develop and publish resources to prevent and address online violence and cyberbullying, and build capacity in Canada to fight disinformation and other online harms.

The government took further steps in March when it issued two policy statements about how investments in Canadian businesses, including cultural businesses, in the interactive digital media (“IDM”) sector will be reviewed under the Investment Canada Act (“ICA”). Under the ICA, all foreign investments in Canadian businesses are screened for national security review and certain investments may be reviewed for “net benefit” if they exceed certain financial thresholds. The policy statement issued by the Minister of Innovation, Science and Industry provides guidance on how national security review may be applied to IDM (the “IDM National Security Policy”) while the policy statement issued by the Minister of Canadian Heritage provides guidance on how net benefit review of cultural businesses in the IDM sector will be carried out (the “IDM Cultural Review Policy”).

What is “Interactive Digital Media”?

Both policy statements include a similar definition of IDM, with slight differences to account for the fact that national security review applies to a broader scope of businesses than cultural net benefit review does. The common definition of IDM is:

Digital content and/or environments with which users can actively participate or which facilitate collaborative participation among multiple users for the purposes of entertainment, information or education, and are commonly delivered via the Internet, mobile networks, gaming consoles or media storage devices.

The IDM Cultural Review Policy is restricted to “cultural” businesses, such as PC, console, cloud and mobile gaming and certain immersive technology / augmented reality. The IDM National Security Policy covers these businesses as well as other technology platforms which may not be considered cultural businesses, including platforms that can be used for entertaining, education, training and e-commerce.

The IDM National Security Policy

The IDM National Security Policy, similar to other national security policies, calls out the fact that “hostile state-sponsored or influenced actors may seek to leverage foreign investments in the interactive digital media sector to propagate disinformation or manipulate information in a manner that is injurious to Canada's national security”. For the purposes of national security review, the government is focused on investments by entities which are owned or influenced by hostile foreign states in Canadian businesses in the IDM sector. These investments will be given enhanced scrutiny and the factors the government will look at include the reach and audience of the product’s content, whether the products have online elements, the nature and extent of the investor’s ties to a foreign government, whether the Canadian business is likely to be used as a vehicle by a foreign state to propagate disinformation or censor information, as well as the degree of control or influence the investor would likely exert on the Canadian business.

The government recommends that all non-Canadian investors and Canadian businesses in the IDM sector review their investment plans to identify any potential connections to entities owned or influenced by foreign states, particularly hostile states. Investors are also encouraged to consult with or notify the Foreign Investment Review and Economic Security branch at least 45 days in advance of implementing any investment.

While the IDM National Security Policy does not refer to undertakings, the National Security Review of Investments Modernization Act, which received Royal Assent on March 22, 2024, includes provisions which will allow the Minister of Innovation, Science and Industry to accept binding undertakings from investors to support his conclusion that the investment will not be injurious to Canada’s national security. These provisions will come into force upon an order of the federal cabinet.

The IDM Cultural Review Policy

The focus of the IDM Cultural Review Policy is “to ensure a commitment to encourage the creation and retention of Canadian IP in respect to foreign investments in the IDM sector, including investments to directly or indirectly acquire businesses that produce culturally relevant IDM in Canada”. Foreign investments in cultural businesses in Canada’s IDM sector will likely be subject to stringent undertakings, and even if an investment falls below the thresholds for review the government may still issue a discretionary order for review.

Though not explicitly stated in the IDM Cultural Review Policy, the factors listed in the policy reveal a focus on investments by foreign state owned or influenced investors. The factors listed in the policy include the extent to which a foreign state is likely to exercise direct or indirect operational and strategic control over the Canadian business, the corporate governance and reporting structure of the foreign enterprise and whether the Canadian business is likely to continue to operate on a commercial basis, all of which are related to how investments by hostile foreign states are viewed by the government. The policy also lists the degree of competition that exists in the sector and the potential for significant concentration of foreign ownership in the sector as a factor to be reviewed, which could apply equally to non-foreign state-owned entities.

In addition to the typical undertakings required of most foreign investments (which include undertakings to maintain a Canadian presence, including an office, board representation, management representation, etc., and spending commitments), the government may require specific undertakings for investments in the IDM sector including undertakings that address the creative independence of the Canadian business, robust corporate governance and transparency in decision making and requirements for ongoing reporting, auditing and rights of inspection.

Takeaways for Canadian Businesses in the IDM Sector

In light of these policy statements, Canadian businesses that operate in the IDM sector (or that intend to operate in the IDM sector) should be mindful of where they look for funding. A cultural net benefit review or a full national security review could delay closing of a transaction by months and result in a package of undertakings that may place a significant compliance burden on the target Canadian business. Although undertakings are nominally the responsibility of the investor, in practice it is often the Canadian business that is tasked with ensuring compliance. Accordingly, investments by foreign state owned or influenced investors from hostile states should be carefully considered and legal counsel should be retained early to evaluate ICA implications of such investments.