How Legal Advice on a New Product Can Help You
Financial services laws are very complex. The Australian Law Reform Commission has recommended major changes to make the legislation clearer. It’s often uncertain how the law will apply to a new product. Despite your best intentions, the regulator sometimes takes a different view and thinks your product is not compliant. This was what happened with Block Earner when it launched its “Earner” product in 2022.
About the Earner product
The Earner product enabled users to earn a fixed return by lending crypto assets to Block Earner. Block Earner then lent those assets to third parties at a higher interest rate. When the loan ended, the user got back AUD from Block Earner based on the price of the crypto asset, plus a fixed return from the higher yield made by Block Earner from lending the pooled assets.
Block Earner sought legal advice from a leading law firm before launching Earner and believed it was not a regulated financial product.
ASIC did not agree, and began legal proceedings against the company in November 2022.
Original decision
In Australian Securities and Investments Commission v Web3 Ventures Pty Ltd [2024] FCA 64 handed down on 9 February 2024, Jackman J found that Block Earner breached the Corporations Act 2001 (Cth) (the Corporations Act) with the Earner product by offering it without an Australian Financial Services Licence and without registering the product as a managed investment scheme. (In the same case, Block Earner was found not to be in breach for another product called Access.)
Penalty decision
On 4 June 2024, Jackman J gave his ruling on the question of penalties against Block Earner, in Australian Securities and Investments Commission v Web3 Ventures Pty Ltd (Penalty) [2024] FCA 578.
Fortunately for Block Earner, the judge relieved the company from having to pay a penalty. Under the Corporations Act, the court can provide relief for breaching a civil penalty provision where it appears to the court that the person has acted honestly and (having regard to all the circumstances) the person ought fairly to be excused for the contravention (section 1317S). This provision does not remove the breach, only the liability that would otherwise flow from the breach.
One of the circumstances that the judge took into account in the Block Earner case was the legal advice that Block Earner obtained before launching its product. Block Earner claimed privilege over the content of the advice, so it was never disclosed in the legal proceedings, but the judge thought that it was more likely than not that the advice covered off the relevant laws, because Block Earner wanted to ensure that it was fully compliant.
The judge set out this important principle about how getting legal advice may in some cases excuse a person from liability (at 39):
…. subject to the circumstances of the particular case, a person who perceives there to be legal uncertainty in a proposed course of conduct, who then obtains legal advice from a person who is qualified to give it competently, and who then genuinely concludes that there is no identified risk of breaching the law, ought fairly to be excused from liability for a civil pecuniary penalty for later engaging in that conduct and thereby breaching the law, at least in circumstances where the person does not thereby derive a substantial profit or cause substantial harm.
It's important that the court was not dealing with the issue of whether the law was contravened – just believing that you are compliant is no defence to breaching the law (“ignorance of the law is no excuse”). Rather, the court was considering whether the defendant ought fairly to be excused for the contravention.
Some of the other factors that the court took into account when deciding not to impose a penalty were:
Block Earner acted honestly.
There was no actual loss or damage suffered by investors.
The uncertainty of the law in this area.
The adverse media coverage for Block Earner following the original court decision. (The judge said that ASIC’s own media release announcing the decision was misleading).
The active participation of Block Earner in fintech and blockchain industry bodies which sought to engage with government and regulators on the regulation of crypto products.
Lesson from the case
The lesson from this case is that getting legal advice before you launch a financial product is a good idea, particularly when the product has novel features, or the application of the law is uncertain. Even if the regulator takes a different position to the advice, the advice may assist when seeking relief from a penalty.
Do you have a new product proposal?
We love working with our clients on new products. We’ve spent decades navigating the maze of regulations.
If you are seeking legal advice on a new product, please consider using Dwyer Harris. Some of the things we can do include:
Early-stage feasibility advice on new product ideas.
Advice on the legality of the proposed product and potential legal risks.
Drafting product terms and conditions and reviewing marketing material.
Engagement with regulators.
Contact us for a confidential discussion.