Debenture decision all backwards

Ian Rogers

In a decision that seems unlikely to stand, the Federal Court has found that Finder Wallet Pty Ltd’s crypto product Finder Earn is not a debenture.
 
This is the first court loss for ASIC in what is becoming a minor campaign against dodgy fintech debenture operators fecklessly riding the crypto wave.
 
ASIC alleged that the Finder Earn product was a debenture. This is because customers deposited money with Finder Wallet on the understanding that their money would be repaid, together with a return for allowing Finder Wallet to use their capital. 
 
The Court rejected this contention and found the product was not a debenture.
 
ASIC Executive Director Enforcement and Compliance Tim Mullaly said, “ASIC pursued this matter because we considered that this product was being offered without the appropriate licence or authorisation and therefore without the benefit of important consumer protections.”
 
Fred Schebesta, a Finder founder (and a bit of a crypto maniac) wrote on Linkedin that “innovation always move faster than regulation. It highlights the need for more open communication between investors and regulators”.
 
Except that this case was never about innovation. Rather, this case turns on analysis of the legal and economic substance of the Finder Earn product.
 
In order to participate in the Finder Earn product, a customer was required to transfer to Finder Wallet an amount of TrueAUD.  
 
“This could be done by following the ‘Transfer and Convert’ mechanism, subject to the Terms, to acquire TrueAUD,” Justice Markovic wrote in a judgment yesterday.
 
Using the mechanism, the customer was required to deposit Australian dollars into his or her Finder Wallet account. After that, the Australian dollars could be exchanged for TrueAUD, which could be allocated to Finder Earn.
 
On 24 November 2022, Finder Wallet ceased offering the Finder Earn product, Markovic noted.
 
Prior to offering the Finder Earn product to customers Finder Wallet “did not lodge a disclosure document with ASIC [and] did not issue an accompanying disclosure document to its customers.
 
“Nor did it make a target market determination.”
 
ASIC submitted that the Finder Earn product fell squarely within the definition of “debenture” in s9 of the Corporations Act and that definition may be separated into its constituent parts by asking: 
 
(a) was there money deposited with or lent to the body; 
 
(b) is there a ‘chose in action’; and 
 
(c) if so, does the chose in action include an undertaking by the body to repay as a debt the money deposited or lent? 

In transferring funds to TrueAUD “the customer lent the AUD to Finder Wallet, as the FAQs on the Finder Website and in the Finder App made clear,” ASIC wrote in its submission.

“On entering into the transaction Finder Wallet … promised to repay that amount with interest.”
 
Straightforward stuff, except the judge ruled not so.
 
ASIC will surely appeal this decision.