The recent decision in Australian Securities and Investments Commission v Scholz (No 2) [2022] FCA 1542 (“Scholz”) highlights the dangers social media influencers face in providing opinions and recommendations in respect to share trading on the Australian Securities Exchange (the “ASX”).
In Scholz, it was determined that in the course of making public Instagram posts, and conducting private training courses relating to trading on the ASX, Mr Scholz through the Instagram persona the “ASX Wolf” was carrying on a financial services business by providing financial product advice in contravention of section 911A(1) of the Corporations Act 2001 (Cth) (the “Corporations Act”). Section 911A(1) provides that it is a statutory requirement to hold an Australian financial services licence when carrying on a financial services business.
While Scholz involved and considered various procedural issues, such as the admissibility of evidence seized pursuant to search warrants executed in respect of Mr Scholz, this article will focus on the key issue in the proceeding which was whether Mr Scholz carried on a financial services business without holding an Australian financial services licence.
The social media business
Mr Scholz carried on the financial services business between at least early 2020 and November 2021 and in that period he made significant sums of money. It had been identified that during the period from 26 October 2020 and 4 August 2021, a total of $1,156,500 was received in Mr Scholz’s bank accounts. Mr Scholz did not hold an Australian financial services licence within the relevant period.
In the early period, Mr Scholz posted positive Instagram stories about particular companies which often indicated that he had acquired shares in the company or that he thought that shares in the company would be a good investment (the “first activity”). In engaging in the first activity, Mr Scholz would also depict himself enjoying a lavish lifestyle.
By no later than mid-2020, Mr Scholz was engaged in selling private “tips” about shares to clients for $500.00 (the “second activity”).
Mr Scholz also promoted on Instagram seminars designed to teach attendees about how to trade on the ASX and charged $500.00 to attend those seminars which were held over zoom or in person in Queensland (the “third activity”). Mr Scholz would use direct messaging on Instagram to facilitate payment for the seminars and promote the seminars by emphasising his apparent 10 years of trading experience. In the seminars, Mr Scholz would also express views about shares in particular companies, which coincided with references to those shares being mentioned during the course of the first activity.
The third activity was described as “stage 1”, which encouraged the attendees to progress to “stage 2”, which was a private discord group in which members could anonymously exchange share tips (the “fourth activity”). Members paid $1,000.00 a year to participate in the fourth activity and Mr Scholz also promoted the fourth activity on Instagram. These members were also given advance notice by Mr Scholz of the share recommendation he was planning to post on his Instagram account.
There was also a “stage 3” of the business, but little evidence was led with respect to this stage.
There was evidence led, by way of Instagram direct messages sent by Mr Scholz, admitting he used his Instagram to engage in a “clever way of pumping” and essentially engaging in what is commonly known as a “pump and dump scheme”. However, it was not determined in the matter whether Mr Scholz engaged in the activity of “dumping” the shares he acquired and “pumped”.
Is an Australian financial services licence required
Section 911A(1) of the Corporations Act relevantly provides that:
911A Need for an Australian financial services licence
- Subject to this section, a person who carries on a financial services business in this jurisdiction must hold an Australian financial services licence covering the provision of the financial services.
A financial services business is a business of providing financial services, and financial services are provided by a person if they provide financial product advice.
Section 766B(1) Corporations Act provides:
(1) For the purposes of this Chapter, financial product advice means a recommendation or a statement of opinion, or a report of either of those things, that:
(a) is intended to influence a person or persons in making a decision in
relation to a particular financial product or class of financial products,
or an interest in a particular financial product or class of financial
products; or
(b) could reasonably be regarded as being intended to have such an
Influence. It does not matter if only part of the business is comprised of providing financial services, as a reference to a business in the Corporations Act is a reference to a business of that kind that is part of, or is carried on in conjunction with, any other business.
Mr Scholz providing financial product advice
The first activity
It was determined that by engaging in the first activity a likely consequence would be that people would perceive that Mr Scholz obtained the funds to engage in his lavish lifestyle by trading on the ASX, and this would influence viewers of his stories to acquire the shares Mr Scholz had acquired and in turn, this would increase the value of the shares. Further, given the direct messages relating to his Instagram story as being a “clever way of pumping”, it was determined that he was aware that he was influencing people to acquire particular shares.
Contrary to the submission by Mr Scholz, the posting of such stories by him in his guise as the “ASX Wolf”, in the context of the other posts on the Instagram account and having regard to the content of these stories, constituted a recommendation or expression of a statement of opinion within the meaning section 766B(1) of the Act.
By engaging in the first activity, Mr Scholz provided financial product advice.
The second activity
The evidence established that Mr Scholz was likely to have provided private tips about shares in particular companies to clients, including paying customers. A submission made by Mr Scholz was that the tips given were only “generic”, but this submission was rejected as it was objectively unlikely that a person would pay $500 for a generic tip.
There was little evidence of the content of the communications by Mr Scholz to any recipient of the private tips, or the circumstances in which any share tip was communicated. It was determined that there was insufficient evidence to conclude that Mr Scholz gave financial product advice in this regard.
The third activity
It was determined that by engaging in the third activity and making comments and expressing opinions during the seminar with reference to particular companies, statements made by Mr Scholz during those seminars were reasonably capable of being regarded as intended to influence persons in making a decision in relation to a particular financial product. This was particularly so in circumstances where the particular companies mentioned in the seminars coincided with those mentioned during the first activity, being the Instagram stories.
By engaging in the third activity, Mr Scholz provided financial product advice.
The fourth activity
It was determined that by engaging in the fourth activity, Mr Scholz was making a recommendation which was reasonably capable of being regarded as intended to influence persons in making a decision in relation to a particular financial product. It was also evident that Mr Scholz intended for various messages about the particular shares to be relied upon by the recipients.
By engaging in the fourth activity, Mr Scholz provided financial product advice.
Mr Scholz engaging in a financial services business
Given the first activity, third activity and fourth activity were determined to be the provision of financial product advice, the next issue to be determined was whether Mr Scholz carried on a financial services business.
It was found that the combination of the Instagram stories, seminars, and discord messages had many features of a commercial enterprise, and that of a business. The activities were conducted using particular branding and marks associated with the “ASX Wolf”, and also the provision of the financial product advice formed an integral part of the business.
Mr Scholz attempted to rely upon the decision in Australian Securities and Investments Commission v Pegasus Leveraged Options Group Pty Ltd (2002) 41 ACSR 561; [2002] NSWSC 310 at [77], citing the following relevant:
It is important in this regard to distinguish between carrying on a business in the
course of which advice is given about securities, and carrying on a business of advising other people about securities
That submission was rejected, as, the above-mentioned decision referred to previous legislation, which has a different test as to that provided for in the Corporations Act.
It was determined that Mr Scholz carried on a financial services business from March 2020 until November 2021.
In those circumstances, Mr Scholz attempted to rely on an exemption in section 911A(2)(eb) of the Act, which in essence provides an exemption to the need to hold an Australian financial services licence if the business is the service of providing general advice by transmitting it on an information service that is generally available to the public and the sole or principal purpose of the transmissions is not the provision of financial product advice.
It was determined that the majority of the advice provided by Mr Scholz was general advice and was transmitted by means of an information service (save for the direct messages). Mr Scholz failed in the final stage of the test and could not establish that the sole or principal purpose of the transmissions was not the provision of financial product advice. The evidence was replete with examples of Mr Scholz expressing opinions and making recommendations about the purchase of shares on the ASX, and there was an absolute lack of any other relevant purpose of those transmissions.
The quantum of civil penalties will be determined by the court during a separate hearing.
What next?
There has been a steep incline in the action taken by the Australian Securities and Investments Commission relating to the conduct of social media influences. While Scholz relates to conduct relating to the provision of financial product advice, recently the Australian Securities and Investments Commission appears to also be cracking down on social media influencers failing to disclose their paid affiliations with products and services they promote.
We would recommend that any social media influencers need to carefully consider each post, story or video prior to considering posting to ensure that they do not contravene the many pieces of legislation which govern the activities engaged in by social media influencers. If a notice is received from the Australian Securities and Investments Commission (or any other government department) alleging contraventions, legal advice should be obtained as soon as possible.
Marino Law can assist in providing tailored advice to social media influencers with respect to their intended posts and act on their behalf if contraventions are alleged.
