Court relieves Block Earner of liability for breaches of Corporations Act

Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578

In Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578, the Federal Court of Australia (Jackman J) considered whether to relieve the defendant from pecuniary penalties for contraventions of the Corporations Act 2001 (Cth) (Act). The defendant, trading as Block Earner (Block Earner), offered the “Earner” cryptoasset fixed-yield product without holding an Australian financial services licence (AFSL) or registering it as a managed investment scheme. The Court had earlier found (in [2024] FCA 64 (Contravention Judgement), covered in an earlier case note) that this breached ss 911A(5B) and 601ED(8) on the basis that the “Earner” product was both a facility for making an investment (and thus a financial product) and a registrable managed investment scheme.

The Court’s primary focus was whether Block Earner should be relieved from liability under s 1317S(2), which allows relief from certain civil penalty provisions of the Act (including ss 911A(5B) and 601ED(8)) if the contravener acted honestly and ought fairly to be excused given the circumstances. The Court declared that Block Earner had contravened the Act but granted relief from pecuniary penalties, emphasising the honesty in Block Earner’s actions and its reliance on legal advice.

Did Block Earner act honestly?

Block Earner’s CEO and Compliance Officer concluded that the Earner product did not require an AFSL or registration as a managed investment scheme, and took legal advice from the firm Gilbert + Tobin. Block Earner’s documented Enterprise Risk Management Framework (ERMF) stated “Whilst recognising that regulatory non-compliance cannot be entirely avoided, Block Earner strives to reduce this to an absolute minimum.” His Honour accepted these facts as evidence of Block Earner’s honest belief in the legality of its product, and was prepared to make assumptions as to the scope and content of the advice, although Block Earner did not waive privilege in the advice and it was therefore not in evidence.

Should Block Earner fairly be excused?

Block Earner relied on seven matters in submitting that it ought fairly to be excused. These included that the contraventions arose from an honest view about the application of technical definitions in the Act, that no loss or damage was suffered by investors, that the benefit obtained by Block Earner was modest, that the contraventions arose in an uncertain regulatory environment, and that Block Earner had received adverse and unfair media coverage as a result of the proceedings that had affected its legitimate business, that it had not previously been found by a court to have engaged in similar conduct, and that “it had been actively involved in policy discussions with key industry participants and regulators concerning crypto-related products.”

The Court recognised the honest yet erroneous view on the technical definitions in the Act. The Court found that obtaining and acting on legal advice was a significant mitigating factor. Importantly, his Honour had found it was more likely than not that legal advice actually obtained by Block Earner from Gilbert + Tobin was directed generally to whether Block Earner’s products and services complied with all relevant laws and regulations. According to his Honour, “There would have been no practical point in Block Earner confining its request for legal advice more narrowly at a time before ASIC had raised any particular potential contraventions with Block Earner.” He also considered the facts that Block Earner considered and relied on the legal advice from Gilbert + Tobin in concluding that the Earner product did not involve any contravention were “obvious inferences to draw” (both at [33]).

Further, the complexity and evolving nature of regulations surrounding cryptoassets were highlighted, Block Earner referring to a 21 March 2022 Australian Treasury consultation paper referring to insufficient clarity in the definition of financial product as to the intended regulatory treatment of a wide variety of novel crypto assets, and to the Australian Law Reform Commission’s media release of 18 January 2024 which stated that “the legislation governing Australia’s financial services industry is a tangled mess – difficult to navigate, costly to comply with, and unnecessarily difficult to enforce.” This regulatory uncertainty was significant in the Court’s decision to excuse Block Earner. 

Block Earner’s profit from the Earner product was small at $21,309.60, which was earned primarily from lawful currency conversion, not the yield product itself. Importantly, no loss or damage was suffered by investors due to Block Earner’s actions. While the judge accepted ASIC’s contention that investors were exposed to risk due to Block Earner not meeting the $10 million net tangible assets requirement, this did not result in actual loss.

The Court also found that an ASIC media release headed “Court finds Block Earner crypto product needs financial services licence” suggested ongoing illegality for a product no longer offered (and which had been withdrawn a month after ASIC’s first warning letter) and was therefore misleading and unfair. This coverage was a factor in mitigation, recognising the additional harm caused by such publicity.

Penalty considerations

The Court also went on to consider what the penalty would have been, had relief under s 1317S(2) not been granted. The Court found that, even if relief had not been granted, no penalty would have been appropriate in all the circumstances, despite the maximum possible penalty being $11.1 million.

His Honour considered Block Earner’s constrained financial circumstances including its very limited free cash, and the need for penalties to be fair and proportionate. The Court stressed that civil penalties should promote compliance without being oppressive, and that imposing any penalty on Block Earner, given its financial constraints, and likely job losses that would result, would cross the line from deterrence into oppression.

Block Earner’s prompt cooperation with ASIC’s investigation and swift withdrawal of the Earner product after receiving ASIC’s concerns were also taken into account. This proactive response, along with the absence of previous similar contraventions, supported the decision to relieve Block Earner from penalties.

Block Earner had not been previously found to engage in similar conduct, although this was not significant given it was only formed in 2021. Additionally, Block Earner’s active involvement in policy discussions and industry bodies demonstrated a commitment to regulatory compliance. The Court viewed this as evidence of its intention to operate lawfully within a complex regulatory landscape.

Costs

In the Contravention Judgement, the Court had found in favour of ASIC on liability for the “Earner” product, but found that Block Earner’s “Access” product, a decentralised finance or “DeFi” yield product, was not a financial product or a managed investment scheme, thus no contraventions were found regarding it. His Honour found that each party should bear its own costs up to that judgment.

The Court awarded Block Earner costs for the penalty phase of the proceedings, citing its success under section 1317S. The misleading media release by ASIC, was found to have breached the overarching purpose of the Federal Court of Australia Act 1976 (Cth) to facilitate just dispute resolution. This further justified the costs awarded to Block Earner.

Appeal by ASIC; implications

On 17 June 2024, ASIC filed a Notice of Appeal against the decision, arguing errors in the Court’s inferences about the legal advice Block Earner received and the consideration of regulatory complexity. ASIC contended that the Court wrongly inferred Block Earner’s reliance on legal advice without the advice being in evidence and erred in excusing Block Earner against a background of legal uncertainty.

This case highlights the importance of thorough legal and regulatory compliance for firms operating in emerging sectors like cryptoassets. Companies should document their risk management strategies, seek legal advice, and retain privilege over such advice to mitigate potential liabilities.

A significantly longer version of this note, with additional commentary, is available from the author via LinkedIn at: Laurence White | LinkedIn.

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