ASIC’s interim stop orders on Holon’s TMDs
ASIC publicly announced interim stop orders via media release
Holon Investments Australia Limited (“Holon”) went through a lengthy and detailed licensing application process with the Australian Securities and Investments Commission (“ASIC”) to be granted an Australian Financial Services License (“AFSL”) to act as the Responsible Entity of three Digital Asset Funds registered by ASIC as managed investment schemes (“MIS”):
• Holon Bitcoin Fund ARSN 659 090 294;
• Holon Ethereum Fund ARSN 659 090 516; and
• Holon Filecoin Fund ARSN 659 090 614 (together the “Funds”).
Holon’s AFSL (N0. 532669) was granted on 12 May 2022, and the Funds were launched on 11 June 2022.
Without any prior communication, ASIC issued an interim stop order on the Funds and made a Press Release regarding this action on Monday 17 October 2022, citing perceived issues with the Fund’s Target Market Determinations (“TMDs”) and, we note, not the Funds themselves. The orders were valid for 21 days unless revoked earlier.
ASIC hearing and further interim stop orders
Additional interim stop orders were issued by ASIC on 28 October 2022 after a hearing on the same day to allow time for Holon to amend the TMDs to address ASIC’s concerns. ASIC made it clear at the hearing that it was not governed by the rules of evidence in these cases1 though it will seek to resolve matters quickly. We have yet to receive any further correspondence from ASIC.
The below provides a brief overview of issues for transparency and stakeholder purposes.
Holon’s design of the Funds is to protect Australian retail investors
Holon’s mission is to be at the cutting edge of innovation and investment, and these Funds represent new territory for Australia. We take the role of regulation seriously and have called for greater regulation relating to digital assets in the Australian market. We have regularly contributed to government and regulator consultations on digital asset regulation using our expertise across financial services and Web 3.0.
Some 44% of Australian retail investors hold cryptocurrency (digital assets) according to a recent ASIC survey. Holon’s Funds were created so that Australian investors can participate in these digital asset markets via regulated MIS on a cost-effective basis. The Funds provide investors with access to a professionally managed portfolio to avoid some of the significant risks associated with holding digital assets directly or via an unregulated exchange. Additionally, offering digital assets via a MIS allows digital assets to be brought into the oversight of financial advisers, providing further protection to investors.
Design and distribution obligations
The Design and Distribution Obligations (“DDO”) came into force from 5 October 2021 to assist consumers in obtaining financial products appropriate for them. This is achieved through the preparation and issue of a TMD for a retail financial product. The stated underlying principles of the DDO obligations include that they should:
• be flexible and scalable
• not inhibit product innovation and access
• avoid unnecessary regulatory costs.
We acknowledge that both TMDs and digital assets are new regulations and activities for ASIC, and the importance of the regulator and industry working together to support Australian investors when integrating new technologies and asset classes in financial services is critical to provide consumer confidence.
Holon followed industry standards in drafting Fund TMDs
In the interim orders, ASIC was concerned that Holon did not appropriately consider the features and risks of the Funds in determining the target markets, and ASIC considered that the Funds were not suited to the target market defined in the TMDs, which includes investors:
• with a potentially medium, high or very high risk and return profile; and
• intending to use the Fund as a satellite component (up to 25%) of their investment portfolio; and
• intending to use the Fund as a solution/standalone component (75-100%) of their investment portfolio.
In preparing the TMDs for each Fund, Holon implemented the TMD template and guidance material from the Financial Services Council (“FSC”), and other industry guidance such as the Association of Superannuation Funds of Australia (“ASFA”)/FSC Standard Risk Measure for Trustees, supported by a data driven and evidence based approach.
Given the complexity that arises from potentially hundreds of inconsistent approaches, the FSC template and standards facilitate the necessary flow of data between financial advisers, platforms and product issuers. The FSC standards involved considerable consultation with industry and ASIC.
Holon’s risk profile amendments may exclude most Australians from investing in the Funds
In relation to ASIC’s concerns with a potentially medium, high or very high risk and return profile for the TMDs, ASIC considered the volatility and risk profile of the Funds in isolation, and not as part of an overall diversified investment portfolio which is inconsistent with the guidance published by the FSC or known investment management principles.
Further, ASIC’s performance and return profile analysis was based on one-year of data which is inconsistent with the Funds’ minimum suggested investment horizon and Holon’s data analysis that supported this. As such, to meet ASIC’s concerns, Holon’s amendments to the TMDs fall outside of the FSC template and industry standards.
Of significance is that ASIC’s proposed classification of the Funds as quarantined to an escalated risk and return profile of ‘very high risk’ – irrespective of a diversified portfolio – may effectively exclude most Australian retail investors from participating in the Funds.
Holon’s ‘satellite component’ amendment potentially impacts industry data flows
In relation to ASIC’s concerns of the intended use of the Funds as a satellite component (up to 25%) of their investment portfolio, Holon has had to amend the definition of a ‘satellite/small allocation’ in the TMDs to be less than 5% of their investible assets as opposed to the FSC standard definition of a satellite being less than 25% of their investible assets to meet ASIC’s concerns. Again, this falls outside the current FSC TMD Template and potentially impacts the flow of data between financial advisers, platforms and product issuers.
In relation to the Funds as a ‘solution/standalone’ component issue identified by ASIC
In relation to ASIC’s concerns of the intended use of the Funds as a solution/standalone component (75-100%) of their investment portfolio, Holon has amended the typographical error in the TMDs to be consistent with the disclosure that a retail investor is not part of target market for the Funds if they intend to use the Fund as a solution/standalone allocation (75%-100% of their investible assets).
We note that the typographical error did not lead to a risk of an investor outside of the target market investing in the Funds. In the interests of ensuring that only investors within the target market are accepted into the Fund, Holon has implemented a series of ‘knock out’ questions relating to the TMDs. A retail investor outside of the target market is prevented from applying if they intended to use the Fund as a solution/standalone allocation.
Overall, Holon has considered the fact that digital assets would unlikely be the sole financial asset of an investor. Nor would an investor likely have the same risk and return profile across their portfolio. For example, the component relating to a satellite component would reasonably be expected to have a higher risk and return profile than the core of the investor’s portfolio.
We note that the issuer of the TMD is not required to consider the individual circumstances of each investor under its TMD. Furthermore, as the primary distribution channel for the Funds is licensed financial advisers, most investors will be advised within the context of a diversified portfolio.
Industry and investor implications
- From an investment management perspective, it is difficult to predict and reflect TMD considerations that meet ASIC’s concerns if those concerns are derived from outside of industry standards and practices. It also has significant industry-wide implications for consistent data capture and flow between financial advisors, platforms and product issuers (and better-informed investors) if non-standard approaches are employed.
- From a public policy perspective, potentially excluding most retail investors from participating in a regulated MIS of digital assets by virtue of deeming those assets as ‘very high-risk’, irrespective of the individual’s diversified investment strategies, may force the 44% plus of retail investors to move further into the unregulated ‘crypto-wilderness’. This may see many Australians inadvertently taking on even more risk, leaving them relatively unprotected within an asset class that continues to grow and attract demand, but not subject to the same regulatory scrutiny as traditional asset classes.
Documents to this Press Release
Links to relevant ASIC and Holon documents in relation to the interim stop orders are provided for transparency purposes:
ASIC’s Initial Stop Orders – 10 October 2022
- Interim Stop Orders – Holon Bitcoin Fund
- Interim Stop Orders – Holon Ethereum Fund
- Interim Stope Orders – Holon Filecoin Fund
- TMD Notice of Hearing
- Administrative Hearings Information Sheet
- ASIC Statement of Concerns – Holon Bitcoin Fund TMD
- ASIC Statement of Concerns – Holon Ethereum Fund TMD
- ASIC Statement of Concerns – Holon Filecoin Fund TMD
- Holon Bitcoin Fund TMD
- Holon Ethereum Fund TMD
- Holon Filecoin Fund TMD
Holon’s responses to ASIC’s statements of concern
ASIC’s additional stop orders – 28 October 2022
0417 996 050
Holon is a next generation asset manager and Web 3.0 data storage provider. We believe innovation drives wealth creation, and everyone should have access to investing in the best companies and technology of today, tomorrow and the future.
For more information, visit www.holon.investments.
 ASIC Regulatory Guide 8 ASIC Practice Hearings Manual p7