Authors: Michael Bacina, Steven Pettigrove, Jake Huang, Lola Hickey, Luke Misthos
Holon Capital, which was granted an Australian Financial Services Licence in May of this year and launched three crypto focused funds (Bitcoin, Ethereum and Filecoin) in June was recently the subject of a “no-warning” stop order from the Australian Securities and Investments Commission (ASIC) with ASIC using new design and distribution obligation powers granted to it following the Hayne Royal Commission. Further interim stop orders have since been made freezing distribution of those funds indefinitely.
ASIC’s objections were raised in relation to the Target Market Determinations (TMD) required to be published by Holon as part of offering financial products to retail investors under 944B of the Corporations Act which requires that:
A target market determination…must be such that it would be reasonable to conclude that, if the product were to be issued, or sold in a regulated sale… to a retail client in the target market–it would likely be consistent with the likely objectives, financial situation and needs of the retail client.
If a product issuer permits investors who are outside the target market to be issued with their products, then serious consequences can follow.
Typically “no-warning” enforcement is a rarely used tool in a regulator’s toolbox, as regulators wish to engage fairly with those they regulate and have obligations to provide procedural fairness in the exercise of their function.
It is more typical to see a “no-warning” stop order where there is a critical time sensitivity or pressing concern over a product. The use of a “no-warning” approach to Holon invites an inference in relation to ASIC’s view towards crypto-assets. ASIC has been suggesting for years that crypto-businesses consider obtaining financial services licensing where those products involve financial products.
Holon have published the stop orders and their other correspondence with ASIC, showing that since 10 October 2022, Holon’s three retail funds have been barred from dealing with retail investors. ASIC’s statement of concerns states, in relation to “medium” and “high” risk investors:
it cannot reasonably be concluded that, if the product were to be issued or sold in a regulated sale to a retail client in the target market, it would likely be consistent with the likely objectives, financial situation and needs of the retail client.
ASIC continues, asserting that the fund is not appropriate for “very high” risk investors either:
There are investors included in the target market for the Fund that may fall within Holon’s limited definition of a “Very High” risk and return profile, but because of the significant volatility and deep negative returns in a given year, the Fund would not be suitable for them.
Similar positions are put in relation to Ethereum and Filecoin. Holon’s response highlighted the manner in which they had followed TMD guidance and templates for determining a target market for the fund, based on well understood investment principles. Those approaches appear to have been rejected by ASIC with further stop orders being made.
Luke Benhcke of Holon said to the Australian Financial Review:
ASIC has formulated a carte blanche view on crypto assets and don’t seem to be acknowledging standard investment principles for these types of financial products.
This kind of approach is likely to be viewed as “regulation by enforcement” and sends a chilling message to those who have been seeking to offer crypto-asset financial products under licence in Australia.
Of even greater concern, if the CASSPr licensing currently underway with Treasury ultimately results in a markets licence which falls under design & delivery obligations requiring a TMD for the offer of crypto-assets, the approach adopted by ASIC in relation to Holon could lead to a de facto ban over crypto-assets being offered by any Australia CASSPr licence holders.
The perverse outcome, noted by Holon in their submissions, is that with increasing numbers of Australians owning crypto-assets directly, an insured and licensed fund offering would provide additional options for those who do not wish to be exposed to the risk of losing passwords or facing counterparty risk with digital currency exchanges. By shutting these funds, the protections to investors offered by those funds are denied to investors. ASIC’s submissions unfortunately do not suggest a path to the funds being offered in a compliant way.
At a minimum, the reputation of Australia as a jurisdiction which is welcoming to crypto-asset businesses, investment and jobs is tarnished by this approach, with more businesses likely to leave our shores for jurisdictions that offer greater certainty and technology enabling regulation.
