On March 1, 2024, the Government of Canada unveiled two new foreign investment policies relating to the interactive digital media sector: one relating to national security reviews and the other to cultural investment reviews.

The policies define “interactive digital media” (“IDM”) as, without limitation, “digital content and/or an environment in which users can actively participate or that facilitates collaborative participation among multiple users for the purposes of entertainment, information or education, and commonly delivered via the Internet, mobile networks, gaming consoles or media storage devices.”

In the context of national security, this broad definition captures, for instance, video games (including online gaming and consoles) and technology platforms that can be used for entertainment, education, training, and e-commerce (including some mobile apps and virtual and/or extended reality devices). Cultural activities likely to fall within the IDM sector are potentially more narrow and include, for instance, PC gaming, console gaming, cloud gaming, mobile gaming, and some immersive technology/augmented reality.

In an accompanying joint statement from the Honourable François-Philippe Champagne, Minister of Innovation, Science and Industry, and the Honourable Pascale St-Onge, Minister of Canadian Heritage, the ministers noted:

While Canada continues to welcome foreign direct investments that support the growth of the sector, the Government of Canada recognizes that hostile state-sponsored or state-influenced actors may try to leverage foreign investments in the interactive digital media sector to spread disinformation and manipulate information. The government also recognizes the importance of ensuring the presence of distinct Canadian-owned and Canadian-created intellectual property that allows for the creation of Canadian stories and cultural products.

While the new policies do not appear to be a radical change from the existing approach to investments in the IDM sector, they signal that heightened scrutiny of foreign investments in the IDM sector will be ongoing.

National Security Policy Statement

The Policy Statement on Foreign Investment Review in the Interactive Digital Media Sector sets out the government’s approach to considerations of national security matters in the IDM sector (the “National Security Policy Statement”).

By way of background, in Canada, when the Minister of Innovation, Science and Industry has reasonable grounds to believe that an investment by a non-Canadian could be injurious to national security, the Governor in Council may make an order for the review of the investment on national security grounds (a “national security review”).

In the National Security Policy Statement, the Government of Canada has declared that it will consider the following factors when assessing whether an investment in a Canadian business in the IDM sector is injurious to national security:

  • The reach and audience of the product’s content;
  • Whether the products have online elements (such as in-game chat logs, in-game purchases, and microphone/camera access);
  • 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 in a manner that is inconsistent with Canadian rights and values through the investment;
  • The composition of the board of directors of the Canadian business; and
  • The degree of control or influence the investor would likely exert on the Canadian business, including its products’ content.

The stated impetus for the enhanced scrutiny is the alleged heightened risks of state-sponsored or influenced actors propagating disinformation or manipulating information in a manner that is injurious to Canada’s national security. By manipulating information, the National Security Policy Statement means, among other things, the omission of facts, inauthentic amplification of narratives, doctored audio/visual content, trolling, and efforts to censor or coerce self-censorship of information.

Because the IDM sector will be subject to enhanced scrutiny under the Investment Canada Act, non-Canadian investors are encouraged to consult the Investment Review Division at least 45 days in advance of implementing any investment in the IDM sector.

Cultural Business Policy Statement

In addition to the National Security Policy Statement, the Government of Canada also published a Policy Statement on the benefit reviews of Foreign Investments in Cultural Businesses in the Interactive Digital Media Sector under the Investment Canada Act (the “Cultural Business Policy Statement”). The Cultural Business Policy Statement states that non-Canadians seeking to invest in businesses in Canada’s IDM sector that own or create intellectual property can expect to be subject to strict undertakings.

Whereas the National Security Policy Statement was motivated by concerns of information manipulation by foreign state actors or foreign state-influenced actors, the Cultural Business Policy Statement is motivated by the Government of Canada’s desire for cultural businesses in Canada to be owned by Canadians and reflective of Canadian voices, values, and national identity.

By way of background, in Canada, the Minister of Canadian Heritage is responsible for reviewing investments involving the acquisition of control or the establishment of a business engaged in activities related to national identity or cultural heritage (i.e., a business engaged in producing, publishing, distributing, selling, or exhibiting the printed word, video recordings, or audio recordings) to determine if the investment is of “net benefit” to Canada. The Minister of Innovation, Science and Industry is responsible for reviewing all other reviewable transactions.

In the Cultural Business Policy Statement, the Government of Canada has declared that it will consider the following factors when assessing whether an investment in a Canadian cultural business in the IDM sector would be of net benefit to Canada:

  • The extent to which a foreign state is likely to exercise direct or indirect operational and strategic control over the Canadian business as a result of the investment;
  • Whether the Canadian business to be acquired owns or creates its own intellectual property;
  • The degree of competition that exists in the sector, and the potential for significant concentration of foreign ownership in the sector as a result of the investment;
  • The corporate governance and reporting structure of the foreign enterprise, including whether it adheres to Canadian standards of corporate governance and Canadian laws and practices, including free market principles in its Canadian operations; and
  • Whether the Canadian business to be acquired is likely to continue to operate on a commercial basis.

Additionally, for foreign investments in cultural businesses in the IDM sector that involve the creation or ownership of intellectual property, the Minister of Canadian Heritage will take the expression of Canadian voices and stories reflective of Canadian values into account as part of the net benefit review. Such investments can expect to be subject to undertakings that pertain to, among other things:

  • Ensuring the creative independence of the Canadian business;
  • Ensuring robust corporate governance and transparency in decision-making;
  • Requirements for ongoing reporting, auditing and rights of inspection.

Conclusion

Following on the heels of the Government of Canada’s October 2022 policy statement announcing that applications for acquisitions of control of a Canadian business involved in the critical minerals sector by a foreign SOE would only be approved “on an exceptional basis”, these new policies are further evidence of the Government of Canada’s growing concern over foreign influence, especially that of non-likeminded states, in sectors it deems critical to Canada’s economic and security interests.

The unveiling of these two new policies coincides with the Standing Senate Committee on Banking, Commerce and the Economy’s ongoing study of Bill C-34 (the National Security Review of Investments Modernization Act), which, as we have set out in previous updates, will make significant changes to Canada’s national security review process for foreign investments when it is adopted in 2024, as expected.

If you have questions about the national security review process, the cultural business investment review process, or Canadian foreign investment law generally, feel free to contact any member of Fasken’s Competition, Marketing & Foreign Investment group or its National Security Group directly. Our lawyers have significant experience advising clients on all aspects of foreign direct investment, including the emerging national security realities now associated with it.

Please note that the information and guidance in this blog post do not constitute legal advice and should not be relied on as such.