Canada signals heightened reviews of gaming sector foreign investment

On March 1, 2024, the Minister of Innovation, Science, and Industry and the Minister of Canadian Heritage jointly announced new directions on the application of the Investment Canada Act (ICA) in the interactive digital media (IDM) sector, by issuing two new policy statements on (1) foreign investment review in the digital media sector, and (2) benefit reviews of foreign investments in cultural businesses in the interactive digital media sector.

Under Canada’s new regime, IDM will include, among other things, digital content and/or environments that allow for active participation by users or facilitate collaborative participation among multiple users for entertainment, information, or education purposes and that are delivered through the Internet, mobile networks, gaming consoles, or media storage devices. Certain examples include: video gaming, such as PC gaming, console gaming, cloud gaming, and mobile gaming; technology platforms that can be used for educational, training, and e-commerce purposes; and certain immersive technologies like augmented reality.

Under the ICA regime, video gaming was already considered a cultural business in the same way as news stations, or publishers of newspapers and periodicals, and thus were subject generally to heightened governmental review powers to ensure that foreign acquisition, investment, or control is a net benefit to Canada. However, these policies signal the intent of the Government of Canada to further scrutinize foreign investment or ownership in the IDM industry with a view to encouraging the creation and retention of Canadian intellectual property and preventing certain bad actors from impacting Canadian national security.

Policy statement: Foreign investment review in the digital media sector

Ordinarily, all foreign investments in Canadian businesses may be subject to national security review under the ICA. However, the first policy statement newly states that investments in the IDM sector by entities owned or influenced by ‎foreign governments, especially those considered “hostile”, will face enhanced scrutiny under the ICA. While the policies remain silent concerning the categorization of hostile, factors that may be considered in assessing whether a particular transaction in the IDM sector would be injurious to national security include:

• the reach and audience of the product's content;
• whether the products have online elements (such as in-game chat logs, in-game purchases, 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.

Benefit reviews of foreign investments in cultural businesses in the interactive digital media sector

The second policy statement provides guidance on how foreign investments in Canada's IDM sector, particularly those that own or create their own IP, will be reviewed by the Government of Canada under the ICA for their net benefit to Canada. Factors considered in the review include:

• the potential for direct or indirect control over the Canadian business by a foreign state as a result of the transaction;
• whether the Canadian business owns or creates its own IP;
• the level of competition within the sector and the potential impact of the transaction on foreign ownership concentration;
• the corporate governance and reporting structure of the foreign enterprise, including adherence to Canadian standards and laws; and
• the likelihood of the Canadian business continuing to operate on a commercial basis.

In addition, the policy statement notes that foreign investments will likely be subject to stringent undertakings, especially when they involve the acquisition of businesses that produce culturally relevant IDM content. For investments that involve the creation and ownership of IP, particular emphasis is placed on ensuring the continued expression of Canadian voices and stories. As such, net benefit reviews may require undertakings related to:

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

Implications – What does this mean for the Canadian gaming sector?

The Ministers’ announcement of these policies did not seem tied to any particular event and all signs indicate that this has been in the works for some time as a priority of the government. In announcing the policies, they acknowledge the importance of the sector and its international recognition, but express concerns over hostile state-sponsored or influenced actors using investments to spread disinformation or manipulate information.

There was a gaming investment heyday between 2020 and 2022, which saw some of the most significant investment activity in the industry, with excitement from investors driven in part by the relatively low cost of borrowing. Many of those investment activities were spurred by foreign investors—and while the policies do not name who they consider to be hostile states—some of the larger investors come from places like China and Saudi Arabia with whom Canada at least has a politically complicated relationship.

But the market has significantly cooled off as interest rates rose and entertainment venues re-opened, and, in fact, there has been significant layoffs, game cancellations, and failed investments.  While one can certainly understand the Government of Canada’s scrutiny as expressed, the timing of these announced policies is interesting considering that many are currently looking to find stability in the industry.  This may be a particular concern for smaller game studios and emerging or growing Canadian IDM companies, who have traditionally relied on foreign direct investment and strong international relationships and opportunities for growth and innovation given the limits of the Canadian market.

Conclusion and next steps 

In view of this new guidance, the Government of Canada advises foreign investors and Canadian businesses in the IDM sector to assess their ‎investment plans for any connections to foreign state-owned or influenced entities and to consult with the ‎Investment Review Division at least 45 days before proceeding with any investment. Foreign investors in the IDM sector are also reminded that, as cultural businesses, the threshold for a pre-closing net benefit review under the ICA is much lower than for other non-cultural industries. Given the heightened scrutiny under the new policies, it is critical to do an ICA analysis prior to carrying out any investment plans in the IDM sector.

If you would like to discuss the relevance or applicability of these new policies to your business or investment plans, please contact the authors or your DLA Piper relationship partner.