Corporate Advisor Stung for Misrepresenting Initial Coin Offering

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By Daniel Livingston, Partner and Scott Colvin, Lawyer.

Publically-listed DigitalX Limited (ASX:DCC) is being sued by a consortium of investors after allegedly making misleading representations during the promotion of an initial coin offering (ICO) earlier this year.

DigitalX was acting as the corporate advisor for the issuance of OMX Tokens on behalf of Omix Ventures Pvt Ltd, a healthcare startup registered in the Isle of Man. The company advertises itself as a ‘blockchain-based genomics and precision medicine services company’.

A statement of claim filed by the consortium accuses DigitalX of breaching Australian Consumer Law prohibitions on misleading and deceptive conduct, and is seeking damages of around $2.5 million.

It is alleged that DigitalX issued as many as ten times more of the tokens in the issuance than it represented, and with many for nil consideration. It is also alleged to have not honoured representations as to the issue of ‘bonus’ tokens and restrictions on the trading of the token for a period of time after the initial issuance.

The plaintiffs maintain that these actions greatly devalued the token, and that they would not have purchased the token were the misrepresentations not made by DigitalX.

So often we see stories in this space of companies issuing cryptocurrencies on false pretences, or in support of ventures that have little hope of succeeding, often ignoring the potential legal consequences of the representations they make.

In this case, however, Omix seems to have a compelling commercial story behind it. The company itself appears to have an innovative product in an increasingly-crowded market segment, and has notably faced little backlash for its involvement in issuing its own crypto token.

Instead, this is a cautionary tale for the advisers behind the cryptocurrency itself — the pressure is on you to guide your client through to coin issuance (and beyond) in a way that is going to safely protect their interests (and yours) while achieving their desired commercial outcomes.

ASIC Info Sheet 225 on ICOs and cryptocurrencies makes clear that the regulator is mindful of this sort of misleading and deceptive conduct in relation to cryptocurrencies and crypto-assets. And this is true whether the asset being sold or traded is held to be a financial product (and therefore governed by the Corporations Act) or not — in which case the Australian Consumer Law will apply with similar effect.

The info sheet calls out specific examples of conduct ASIC would consider misleading or deceptive, including:

  • using social media to create the appearance of greater-than-actual public interest;
  • executing trading strategies that generate the appearance of greater trading volumes for the ICO or crypto-asset;
  • suggesting in some way that the asset is regulated or regulator-approved; and
  • plain old vanilla failure to disclose relevant material about a product.

Legal advice should be considered a central ingredient in any recipe to promote a crypto-asset, and must be undertaken by lawyers with the requisite skills and experience, to avoid negative outcomes for the client. However, this is a step that is often missed, and almost as often leads to disaster.

Just as the technologies behind blockchain and cryptocurrencies become ever more sophisticated, the more lawyers will need to upskill to meet the demands of clients in these spaces. Lawyers with dedicated expertise in these areas will reduce the amount of court and regulatory action currently being undertaken — provided that advisors, investors and companies will seek them out appropriately.

For further information, please do not hesitate to contact us.

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    M&A/Corporate Advisory

    Corporate Advisory Bulletin - January 2019