A class action has been commenced in the Ontario Superior Court of Justice against a cryptocurrency lender, Voyager Digital Ltd. The proposed class action alleges that Voyager Digital made misrepresentations to investors regarding a loan to a third party and its due diligence measures in relation to it. An unsecured loan Voyager Digital gave to Three Arrows Capital, a hedge fund, put the lender into a precarious financial position concerning the failed Terraform Labs’ cryptocurrencies. Allegedly, the lender misrepresented that it was not affected by the failed cryptocurrencies and that its approach had been low risk.
In July 2022, Voyager Digital disclosed it was commencing bankruptcy proceedings in the United States. It plans to seek recognition of its U.S. case in the Ontario Superior Court of Justice, in line with the Companies’ Creditors Arrangement Act. Voyager Digital has claims against Three Arrows Capital of more than $650 million.
The crash that started it all
Those tuned into the cryptocurrency world are aware of the recent collapse of Bitcoin and other cryptocurrencies. Part of the descent has been owed partly to the implosion of Terraform Labs’ support coin, the Terra (LUNA). Between May 11 and 12, 2022, LUNA crashed from $120 to $0.02, representing a 99.9 percent drop in the span of just 48 hours. It continued crashing further, dropping to $0.00000112. As a result of the crash, a stock market correction took place, bringing the SPX under 4,000.
Terraform Labs’ stablecoin, TerraUSD, did not crash nearly as much as LUNA but still took a hit, descending from $1 to $0.30. Stablecoins are pegged to more “stable” assets, such as the U.S. dollar or commodities like gold. The purpose of stablecoins is to combat the volatility that is often associated with cryptocurrencies. However, the recent crash affecting both coins and the market at large demonstrates that volatility is the price investors must be prepared to pay if they want to play.
A material change occurred that affected Voyager Digital’s business
Voyager Digital is a cryptocurrency lender based in the United States. It was founded in 2018 to help enhance cost-efficiency, choice, and transparency in the marketplace. It allows for the secure trading of over 100 different crypto assets through its mobile application.
Voyager Digital provided an unsecured loan of more than $650 million to Three Arrows Capital, a cryptocurrency hedge fund based in Singapore. Three Arrows was hit particularly hard by the recent LUNA crash and has experienced significant challenges in recent months. A class action was filed against Three Arrows on June 17, 2022, in the United States District Court for the Northern District of California. On June 22, 2022, Three Arrows Capital defaulted on the Voyager Digital loan.
On June 27, 2022, Three Arrows Capital was ordered by a court in the British Virgin Islands to liquidate. The same day, Voyager Digital issued a notice of default against the hedge fund for failure to make payments on its loan of more than $650 million worth of Bitcoin and USD Coin. When Voyager Digital declared bankruptcy in July 2022, its CEO attributed the financial trouble in part to Three Arrows Capital’s inability to repay its loan. The proposed class action here in Ontario alleges that investors were not made aware of this until it was too late.
Reporting issuers have ongoing disclosure requirements
Ontario’s Securities Act is the provincial legislation that places requirements on companies operating in securities, including stocks, bonds, and options. Reporting issuers are those listed and posted for trading on any exchange recognized by the Ontario Securities Commission.
Under the Securities Act, companies that are reporting issuers in Ontario are required to make certain information regarding their financial status and activities publicly available on a regular basis. For instance, if there is a change in business, such as an unpaid loan causing economic strife, disclosure is required by the following section:
Publication of material change
75 (1) Subject to subsection (3), where a material change occurs in the affairs of a reporting issuer, it shall forthwith issue and file a news release authorized by a senior officer disclosing the nature and substance of the change. […]
Report of material change
(2) Subject to subsection (3), the reporting issuer shall file a report of such material change in accordance with the regulations as soon as practicable and in any event within ten days of the date on which the change occurs.
Is cryptocurrency a security?
There is some question as to whether cryptocurrency is considered a security. Although some have considered cryptocurrencies to be merely a commodity, the Securities Exchange Commission Chair, Gary Gensler, has explained:
“If somebody is raising money selling a token and the buyer is anticipating profits based on the efforts of that group to sponsor the seller, that fits into something that’s a security.”
Regardless of whether cryptocurrency is considered a security in Canada, Voyager Digital is a reporting issuer for the purpose of the Securities Act. This is because shares of the company are listed on the Toronto Stock Exchange (TSX) and Frankfurt Stock Exchange (FRA) and are also traded via Over-The-Counter markets (OTC). As a result, Voyager Digital has the duty of providing ongoing disclosure to its investors. Since the lender’s bankruptcy filing, trading of its common shares was halted on July 7, 2022.
Bader Law in Mississauga Provides Innovative Cryptocurrency and Fintech Legal Solutions
The business lawyers at Bader Law have decades of experience assisting with corporate structuring, financing, and secured lending throughout Mississauga and the Greater Toronto Area. We provide dynamic business law advice and solutions for companies working within the crypto and fintech sectors. To speak with a member of our talented business law group, contact us online or at 289-652-9092.