By Ben Patrick, Partner and Chloe Colfer, Seasonal Clerk

Any consultants advising on financial products, including investments in shares or cryptocurrency products or derivatives, will need to consider whether they need to operate under the umbrella of an AFSL.

Background

The proceeding arose from ASIC’s enforcement action against Web3 Ventures Pty Ltd (Block Earner), which operated a digital asset platform offering customers fixed-yield investment products.

ASIC alleged that Block Earner’s “Earner” product was a financial product under Chapter 7 of the Corporations Act 2001 (Cth) (Act) and that Block Earner had provided financial services without holding the required AFSL.

While the primary judge concluded that the Earner product was a financial product, the Full Federal Court disagreed. ASIC appealed, and the High Court unanimously overturned the Full Court’s decision, finding that the Earner product was a facility through which customers made a financial investment.

The High Court’s Decision

This decision has reaffirmed the deliberately expansive reach of Australia’s financial services regime. The AFSL requirements are not confined to traditional financial products or participants within the financial services industry. They extend to anyone who advises on, arranges or deals in a facility through which a person makes a financial investment.

Central to the decision was the concept of a “financial investment”. The Court rejected the proposition that an investor must obtain a proprietary interest in, or participate directly in, the issuer’s business before Chapter 7 is engaged. Rather, it is sufficient that:

• money is contributed to another person;
• the contribution is used, or intended to be used, to generate a financial return or other benefit; and
• the investor does not exercise day-to-day control over the deployment of those funds.

The Court emphasised that the statutory definitions in Chapter 7 are intended to operate broadly and flexibly, adapting to evolving commercial arrangements rather than being constrained by form, terminology or industry-specific concepts.

Why this matters?

(a) The implications extend well beyond fintech and crypto

The High Court’s reasoning is consistent with earlier authority, including ASIC v Money for Living (Aust) Pty Ltd (No 2) (2006) 155 FCR 349, which recognised the breadth of the “financial investment” concept and emphasised that Chapter 7 applies according to the substance of an arrangement rather than its form. Together, the decisions demonstrate that the financial services regime can extend beyond traditional financial products to a broad range of commercial arrangements involving the contribution of capital for the purpose of generating a return.

For corporate consultants, transaction advisers and business strategists, this is an important warning. Advice concerning the contribution, structuring or deployment of capital may constitute financial product advice, even where the engagement is viewed as corporate or commercial rather than financial in nature.

The most obvious example is a subscription for shares. In a conventional share subscription, an investor contributes capital to a company in the expectation that the investment will generate value or a financial return, thus meeting the definition of a financial product. The investor’s role is typically limited to making the investment, leaving decisions about the use of capital to those managing the business.  Advising on the structure or issuing of those shares is likely to require an AFSL.

The decision therefore has broader implications for advisers involved in:

• share issues and capital raisings;
• equity structuring;
• shareholder arrangements;
• investment vehicles;
• joint ventures; and
• other capital deployment strategies.

(b) Getting it wrong can be expensive

The consequences of operating without the required AFSL are not limited to an ASIC investigation and prosecution.  Beyond regulatory exposure, there is the very real prospect of being unable to recover substantial advisory fees.

Section 925E of the Act prevents a person from recovering remuneration for financial services provided in contravention of the AFSL regime, meaning that all fees can be clawed back by the client.

Key takeaways

ASIC v Web3 confirms that the concept of a financial product will be interpreted broadly, with courts focusing on substance over form. Advisers who facilitate arrangements involving the contribution of capital for a return may require an AFSL and, if they provide financial services without one, risk regulatory enforcement action and being unable to recover their fees.

If your business is involved in capital raising, investment structures, financial products or investment-related advice, this decision highlights the importance of understanding whether AFSL obligations may apply. Please contact our team if you would like assistance assessing your licensing requirements or understanding how this decision may affect your business.