The Federal Court of Australia has granted relief to a company under section 1317S of the Corporations Act 2001 (Cth) ("Act") following declarations that it contravened two civil penalty provisions in relation to one of its crypto-related products.
Earlier this year, the court made declarations that Web3 Ventures Pty Ltd trading as Block Earner ("Block Earner") contravened the Act by operating an unregistered managed investment scheme and carrying on a financial services business without an Australian Financial Services Licence, or AFSL.
In a subsequent decision, the court ordered that Block Earner be relieved in full from liability to pay a pecuniary penalty after finding that: (i) it had acted honestly and made a genuine attempt to comply with the Act, including by obtaining legal advice; and (ii) it should fairly be excused, having regard to all the circumstances of the case.
While relief under section 1317S is infrequently granted and ultimately based on the court's discretion, this decision provides guidance on the kinds of circumstances that might weigh in favour of an order. In this case, it was relevant that:
- The conduct arose from the reasonably arguable (but mistaken) belief that there was no identified risk of the product breaching any laws or regulations.
- Investors suffered no loss or damage by reason of the conduct.
- The contraventions occurred in an uncertain regulatory environment.
- Block Earner had demonstrated a willingness to engage with the government on the regulation of crypto-related products.
In considering the extent to which Block Earner should be relieved from liability, the court had regard to: (i) the declarations, which it concluded were sufficient for general deterrence and protection of the public interest; (ii) Block Earner's financial circumstances; and (iii) the need to ensure that a penalty "does not cross the line from deterrence to oppression".
The Australian Securities and Investments Commission has appealed the decision on a number of grounds, including that the court erred in drawing inferences about the scope and effect of the legal advice over which Block Earner maintained legal professional privilege. If affirmed, it could signify a shift in the willingness of courts to grant section 1317S relief in respect of contraventions by crypto-asset service providers, given the degree of uncertainty as to their regulatory treatment under the Act.
