Court relieves Block Earner from penalties; ASIC appeals decision

By John Bassilios, Selina Nutley and Jonathan Taylor

On 4 June 2024, the Federal Court in Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 64 ordered Web3 Ventures Pty Ltd (Block Earner) to be exempt from paying a monetary penalty for conducting a financial services business without holding an Australian financial services (AFS) licence and for operating an unregistered managed investment scheme (the Contraventions).

On 17 June 2024, the Australian Securities and Investments Commission (ASIC) lodged a Notice of Appeal in response to the Federal Court’s decision to provide this relief.

We discuss the Federal Court’s decision to provide this relief, as well as ASIC’s reasons for appealing the decision.

Penalty proceedings

Following the court’s earlier decision on 9 February 2024, which found Block Earner had engaged in the Contraventions (read our previous article on this matter), Block Earner applied under section 1317S of the Corporations Act 2001 (Cth) (the Act) for an order relieving it from liability concerning the Contraventions.

In determining whether to grant such relief, the court considered these questions:

• Did Block Earner act honestly?
• Considering all circumstances, is it fair to grant relief to Block Earner?
• If relief is granted, should it be full or partial? If partial, to what extent?

Did Block Earner act honestly?

The court found Block Earner had acted honestly because:

• it had received advice from a leading law firm regarding whether its product (the Earner product) constituted a financial product or service and whether offering it required an AFS licence; and
• it genuinely believed its ‘Enterprise Risk Management Framework’, which aimed to avoid breaches of laws or regulations, had been adequately satisfied.

The court considered that these steps demonstrated Block Earner’s genuine attempt to comply with the requirements of the Act, leading to the conclusion it had acted honestly.

Is it fair to grant relief to Block Earner?

The court concluded Block Earner should be granted relief, largely for the same reasons it found Block Earner had acted honestly. Additionally, the court considered the following favourable submissions made by Block Earner in support of its application for relief from liability:

• The Contraventions stemmed from Block Earner’s sincere interpretation of technical definitions of financial products under the Act concerning the Earner product. Block Earner obtained legal advice and genuinely believed, without challenge, the product posed no risk of breaching any laws or regulations.
• No investors suffered any loss or damage because of Block Earner providing the Earner product without an AFS licence or registration as a managed investment scheme.
• The Contraventions occurred in an uncertain regulatory environment where government bodies were unsure about the application of AFS laws to crypto-asset service providers like Block Earner.
• Block Earner’s legitimate and lawful business was adversely affected by unfair or incorrect reporting on the initial decision, including reports published by ASIC.
• Block Earner had been actively engaged in policy discussions with key industry participants and regulators concerning crypto-related products and had actively sought to engage with the government on proposals relevant to the impact of cryptocurrency. The court accepted Block Earner’s active participation demonstrated it had sought to conduct its business in a lawful manner and had not consciously sought to provide services in a way that contravened the Act.

What relief was Block Earner provided?

The court noted the widely published declaration of the Contraventions served as sufficient general deterrence and public protection against similar conduct by others. Consequently, the court found Block Earner should be fully relieved from liability for a monetary penalty under section 1317S.

ASIC’s appeal

On 17 June 2024, ASIC lodged a Notice of Appeal with the Federal Court, arguing Justice Jackman erred in granting relief from liability to Block Earner. ASIC based its appeal on these grounds:

• Justice Jackman erred in:
  • inferring that Block Earner relied on legal advice to conclude there was no identified risk that the Earner product would breach any laws or regulations, and drawing favourable inferences regarding the scope, effect and limitations of the legal advice;
  • giving relief when Block Earner profited from the Contraventions found by Justice Jackman;
  • considering regulatory complexity as a relevant factor despite Block Earner knowingly engaging in profit-seeking conduct amid perceived uncertainty; and
  • citing ASIC’s press release as justification for relieving Block Earner from liability, despite no evidence that anyone formed an erroneous belief based on that press release.
• Justice Jackman erred in concluding that if Block Earner hadn’t been relieved of liability:
  • imposing no penalty would not serve the purposes of specific and general deterrence; and
  • there was no evidence to suggest that any penalty would’ve been oppressive.

The appeal will be heard by the Full Federal Court at a later, undetermined date.

What’s the significance of this decision?

This decision recognises the complexity of the AFS laws, particularly as they apply to crypto-assets, and provides guidance on what steps a product issuer may take to potentially obtain relief from liability for contravening a civil penalty provision. Importantly, a key step identified by Justice Jackman was that Block Earner had received legal advice and had robust policies and procedures in place to ensure compliance with the AFS laws.

We eagerly await the outcome of the appeal.

If you’d like to discuss your compliance obligations and how we can help you comply with them, please contact us.