Regulator's financial product appeal falls through in Australia
Rebooted and Refreshed
🗓️ Published on April 23, 2025
The High Court Flips Previous Decision, Sides with Web3 Ventures: 'Earner' Product Not Classified as a Financial Product under the Corporations Act 2001
In an unexpected ruling, the Full Court of the Federal Court of Australia has overturned an earlier verdict that had found against Web3 Ventures—operating as Block Earner—in a legal spat with the Australian Securities and Investments Commission (ASIC). The case centered around the question of whether Block Earner's 'Earner' product could be classified as a financial product as defined by the Corporations Act 2001. On April 22, the court dismissed ASIC's appeal and granted Web3 Ventures' cross-appeal.
THE BACKSTORY
This legal odyssey began when ASIC alleged that Block Earner's 'Earner' and 'Access' products qualified as financial products because they constituted a managed investment scheme or a financial investment facility. Consequently, ASIC claimed that the products contravened the Act, and thus Web3 Ventures needed an Australian financial services licence (AFSL), which they did not possess. In June of last year, the Federal Court ruled in favor of ASIC, finding that the 'Earner' product indeed fell under the umbrella of a managed investment scheme and a financial investment facility.
THE APPEAL
Web3 Ventures stood by their claim that the first-instance judge had erred in reaching these conclusions. The company emphasized that the 'Earner' product did not constitute a managed investment scheme because user contributions were not pooled to generate benefits for those same users. Instead, the users were essentially loaning cryptocurrency to Block Earner in exchange for fixed interest payments, which were used at Block Earner's discretion. Additionally, Web3 Ventures argued that the product was not a financial investment facility because users did not intend Block Earner to generate a financial return for them.
Agreeing with the respondent, the court determined that the first-instance judge had erred in labeling the 'Earner' product as a managed investment scheme. The court underlined the clear terms of use, which stated that users' cryptocurrency was for Block Earner's discretion and that users did not intend for Block Earner to generate a financial return for them. Moreover, the court chastised the lower court judge for misinterpreting the representations made on Block Earner's website, which did not constitute a promise to deliver benefits to users directly linked to Block Earner's lending activities.
Recalling various landmark case law judgments, the court cited Justice Derrington in ASIC v Secure Investments [2020]and the judge in ASIC v Great Northern Developments [2010]. In essence, loans involving payments of interest for the use of money aren't typically characterized as managed investment schemes due to the borrower's intent to generate benefits for themselves, and not for the lender. Additionally, users' expectations of returns from a product do not necessarily convert the product into a financial product under consideration of the members' contributions as compensation.
ASIC raised concerns that the 'Earner' product was a derivative under section 761D of the Corporations Act. ASIC argued that the product's value was directly related to the worth of the cryptocurrency, thereby making it a derivative. However, the court found that the conversion of cryptocurrency to Australian dollars occurred through a separate arrangement and was not an integral feature of the 'Earner' product. Thus, the product did not fit the profile of a derivative. The court strongly emphasized adhering to the statutory definitions and avoiding extending them beyond their intended scope. Furthermore, the court found that the first instance judge's interpretation would have imposed excessive burdens on Web3 Ventures, altering the very nature of the relationship between the company and its customers.
In the aftermath, the court ordered ASIC to shoulder the costs of all proceedings, including the latest appeal. In a brief statement, ASIC acknowledged that it is "reviewing the decision."
THE PARTICIPANTS
In the case of Australian Securities and Investments Commission v Web3 Ventures, ASIC represented Jeremy Giles SC of 7 Wentworth Selborne and Emma Beechey of New Chambers. Web 3 Ventures was defended by Stephen Free SC of Eleven Wentworth and Brandon Smith of Banco Chambers, instructed by Gilbert + Tobin.
- The Full Court of the Federal Court of Australia determined that Web3 Ventures' 'Earner' product did not contravene the Corporations Act 2001, as it was not classified as a financial product under its definition.
- In the wake of the reversed verdict, the Australian Securities and Investments Commission (ASIC) acknowledged that they are reviewing the decision, emphasizing that they need to follow statutory definitions and avoid extending them beyond their intended scope in the realm of business and finance.
- The securities involved in the 'Earner' product, which included cryptocurrencies, were not pooled or used to generate benefits for the users, thereby refuting ASIC's claim that the product was a contravention of the Australian financial product regulations.
