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- The Australian Securities and Investments Commission (ASIC) has taken fintech company iSignthis (ISX) and its Managing Director, John Karantzis, to court
- The corporate watchdog filed a lawsuit over the weekend alleging that the secure payments company and its boss had breached several disclosure obligations
- At the forefront of ASIC’s proceedings is a string of contracts signed in 2018 that allowed iSignthis to allocate some 336.7 million performance shares
- ASIC is alleging that iSignthis did not disclose the nature of the revenue brought in from these contracts properly
- On top of this, ASIC is alleging that iSignthis and Mr Karantzis did not properly disclose information about a terminated agreement with Visa earlier in 2020
- ASIC’s allegations echo concerns raised by the ASX earlier this year in an ongoing legal battle between the market operator and ISX
- iSignthis has acknowledged the ASIC claims, but it has not publically responded to the allegations
- ASIC is seeking financial penalties against iSignthis and to disqualify Mr Karantzis from managing companies in Australia
- iSignthis shares last traded on October 1, 2019, for $1.07 each
The Australian Securities and Investments Commission (ASIC) has taken fintech company iSignthis (ISX) and its Managing Director, John Karantzis, to court.
The corporate watchdog filed a lawsuit over the weekend alleging iSignthis and its boss had breached its disclosure obligations and misled shareholders regarding some high-paying contracts signed during the first half of 2018.
Of particular concern is a huge chunk of revenue in a short span of time coming from just four customers — right before the deadline of some performance share milestone requirements.
ASIC’s proceedings follow a long legal battle between iSignthis and the ASX over the fintech’s continually frozen shares.
ASIC civil litigation
At the forefront of the ASIC proceedings are the 2018 contracts and revenues related to some 336.7 million performance shares.
Essentially, ISX was formerly known as Otis Energy before it purchased all shares in Netherlands-based iSignthis BV and Virgin Islands-based ISX IP in 2014 and 2015.
As part of the buyout, iSignthis would pay just under 300 million ordinary shares and the 336.7 million performance shares.
Importantly, these performance shares were only to be converted to ordinary ISX shares upon the company hitting some important revenue milestone within three years of the buyout.
Among these was a requirement for iSignthis to turn over at least $5 million in revenue over a six-month period within three years of completing the purchase.
If iSignthis failed to reach these goals, all of the performances shares would convert into a single ordinary share.
Nevertheless, iSignthis hit these milestones and company directors were able to nab all of the performance shares on offer under the initial acquisition.
ASIC, however, is taking issue with how exactly the company managed to reach these performance share milestones.
Contract confusion
The corporate watchdog is alleging that iSignthis misled the market regarding three key contracts that enabled the company to reach its performance milestones.
The contracts in question refer to one-off integration and set-up services for Corp Destination, Fcorp Services, and IMMO Servis Group.
iSignthis pulled in around $3 million in non-recurring revenue from these contracts alone in the final six months before the performance deadline was up.
Now, ASIC is alleging that ISX failed to appropriately disclose the nature of these contracts and made misleading representations about the revenue from the deals.
iSignthis initially stated that its revenue from one-off or up-front fees accounted for less than 15 per cent of the total revenue for the fourth quarter of June 2018. ASIC claims the revenue actually accounted for 75 per cent of the total unaudited revenue.
Moreover, ASIC alleges in its Statement of Claim that ISX had received no revenue from either of these three contracted companies in the six months before the start of 2018.
iSignthis then recorded no revenue from Corp Destination or IMMO in the six months after June 30, 2018, but recorded just under $3.4 million in revenue from Fcorp.
Essentially, while ASIC has not directly questioned the legitimacy of the performance shares, the nature of the contracts that allowed the shares to be allocated makes up the bulk of ASIC’s legal claims.
Visa validation
On top of all this, ASIC has taken action against ISX for allegedly failing to disclose appropriate information about a torn-up contract with Visa.
ASIC alleged that ISX failed to disclose that Visa had terminated a relationship with ISX in April 2020.
The watchdog alleged that Visa called the deal off because iSignthis was not operating appropriate anti-money laundering (AML) and risk programs and the ISX transaction monitoring program had failed to identify unusual transactional behaviour.
As such, VISA said, the relationship was off because iSignthis presented an excessive level of risk.
According to ASIC, iSignthis and Mr Karantzis never shared this information with the ASX.
ISX v ASX
ASIC’s legal action comes amid a long-running feud between iSignthis and the share market operator.
The fight began in early October 2019, when ISX shares were frozen in light of some media speculation and disclosure questions.
Over the next three months, ASX would throw several rounds of questions at iSignthis, to which the company responded in great detail. Alas, iSignthis’ answers were not to ASX’s satisfaction, and shares stayed locked up.
As such, almost a year ago to the day — on December 5, 2019 — iSignthis took the battle to Federal Court grounds to demand ASX put its shares back up for trade.
In the first few months of 2020, ASX put together a draft Statement of Reasons (SoR) to explain why it believes ISX is in breach of some important listing rules.
iSignthis said the document was full of “erroneous and unwarranted conclusions” and sought an interlocutory injunction to keep the SoR from being released to the public.
The Federal Court dismissed the injunction application in late-April and allowed the ASX to release a suppressed version of the document to the market.
ISX to deny the claims?
ASIC’s allegations echo many of the concerns raised in the earlier ASX Statement of Reasons — claims which ISX vehemently denied.
As such, while ISX is yet to respond publicly to the ASIC litigation, the secure payments company may fight against the civil charges laid out by the corporate watchdog.
ISX acknowledged the ASIC claims this afternoon and said it will make further announcements regarding the allegations, if appropriate when it has reviewed them.
ASIC is seeking financial penalties against iSignthis, as well as an order that Mr Karantzis be disqualified from managing corporations.
The first court date is yet to be set.
iSignthis shares last traded on October 1, 2019, for $1.07 each.
