The Australian Securities and Investments Commission (ASIC) has sued a division of financial comparison platform Finder, alleging the company offered its recently-shuttered Earn crypto-investment product as an unlicenced financial service, while violating other investor safeguards.
The lawsuit comes just days after Finder CEO Frank Restuccia defended Earn’s place in Australia’s regulatory landscape in an exclusive interview with SmartCompany, claiming Finder was “always on the front foot” in terms of legal safeguards.
The corporate watchdog announced its commencement of civil penalty proceedings in the Federal Court on Thursday afternoon, claiming Finder Wallet Pty Ltd., the subsidiary responsible for Earn, conducted a financial services business without holding an Australian Financial Services Licence (AFSL).
ASIC also alleges Finder Earn was operated as a debenture, a type of financial product requiring disclosure with the regulator and the issuance of a target market declaration, both of which the company allegedly failed to provide.
In failing to provide those disclosures, “consumers were exposed to risk and made uninformed (or inadequately informed) investments, exposing them to a risk of loss in a manner inconsistent” with the Corporations Act 2001, according to court documents filed by ASIC.
“In particular, investors were at risk of making unsuitable investments and incurring potential losses on those investments given that they did not have the benefit of the regulatory regime (including the design and distribution obligations and adequate risk disclosure).”
ASIC is seeking both declarations and financial penalties from the Federal Court.
A date for the initial case management hearing is yet to be determined.
The lawsuit appears to be the first of its kind in Australia, testing if crypto-assets lent to a corporate entity qualify as a debenture. This possibility is likely to a rattle an industry still testing the bounds of regulatory oversight.
Finder Earn, launched as cryptocurrency valuations soared in November 2021, offered users annual returns of 4.01%, and in some cases 6.01%, on crypto-assets lodged with the system.
To access Finder Earn, users transferred Australian currency to TrueAUD, a ‘stablecoin’ with a value “pegged” to the price of fiat currency.
Those assets were then passed to Finder as a kind of loan. “We intend to deploy the capital lent to us across the blockchain ecosystem in a long-term, sustainable and risk-balanced way,” a company website read.
Finder Earn owed $20.8 million to its users on September 30, ASIC states, with the company claiming around 5,000 users at the time of its closure.
Court documents filed by ASIC content that “Finder Earn product was a debenture of Finder Wallet for the purposes of [the] statutory definition.”
“We do not share ASIC’s view that Finder Earn can be regarded as a debenture,” a Finder spokesperson told SmartCompany Thursday, defending Earn as an “innovative product” on the Australian market.
The Finder spokesperson did not specifically address ASIC’s allegation Earn operated as an unlicenced financial product.
But Finder co-founder Frank Restuccia recently defended the company’s ability to offer Earn to users without holding an AFSL.
Speaking to SmartCompany on December 1 — just a week after ASIC sued Australian firm Block Earner for allegedly running its yield-earning cryptocurrency products without an AFSL — Restuccia said Finder has “constructed a product that, you know, we feel is compliant.
“That’s always at the top of our tree when we decide to build products and services; that compliance is always at the top.”
“We regularly engage with all parties to make sure that we are doing that.”
When asked if Earn safely operated without an ASFL, the “pro-regulation” Restuccia said, “We always strive to be the most compliant.”
“We’re always the first to seek out appropriate licences, whatever that has been the past,” he added. “We’re always on the front foot in terms of that.”
The court also action lends a new perspective to Earn’s closure last month, which Finder claims was largely due to macro-economic challenges.
As cryptocurrency values tumbled from their highs through 2022, rising interest rates also made high-yield, crypto-based products like Earn less competitive against traditional savings accounts.
Those difficulties appeared to peak in November, when Finder announced it would close Earn as it was “no longer serving our members as it did in a low-rate environment.”
Finder made no mention of regulatory concerns when announcing its decision to “sunset” the Earn product and return all funds to users.
However, the regulator says it notified Finder Wallet of its concerns before Earn’s final demise on November 24.
Finder has “proactively engaged with ASIC and have cooperated fully with all ASIC requests for information” since Earn’s launch in November 2021, the company spokesperson said.
According to the company, it was only made aware of ASIC’s intention to sue on Thursday.
Senior Business Journalist
Focused on the small business sector, David’s work covers the political, regulatory, and economic issues facing Australian entrepreneurs. Prior to joining SmartCompany, he was a reporter for Business Insider Australia. You can follow him on LinkedIn.
