The staff of the SEC’s Division of Corporation Finance (Division) on December 8, 2022 released guidance for companies issuing securities in an illustrative letter, entitled “Sample Letter to Companies Regarding Recent Developments in Crypto Asset Markets” (Letter).1 The Letter provides a number of sample comments that the Division might issue to companies in connection with the staff’s review of certain filings under applicable securities laws. The comments included in the Letter focus on providing investors with specific, tailored disclosure regarding a company’s involvement with cryptocurrency and other digital assets, together with associated risk factors.
This guidance comes on the heels of notable recent scandals and insolvencies in the cryptocurrency industry. SEC Chair Gary Gensler recently addressed cryptocurrency concerns in the wake of these events, calling on cryptocurrency companies to “come into compliance with the law.”2 The Letter discusses potential disclosure scenarios, and asks companies to detail how such scenarios may affect their operations.
This guidance will be applicable for SEC-registered companies regarding disclosure documents such as “automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements;” companies exempt from registration requirements also should consider the SEC’s positions in the Letter.
In addition to asking companies to disclose generally “any significant crypto asset market developments material to understanding or assessing [their] business, financial condition and results of operations,” the Letter provides a specific, though non-exhaustive, list of sample comments focusing on the material impacts of crypto asset market developments, which could include: a company’s exposure to counterparties and other market participants; risks related to a company’s liquidity and ability to obtain financing; and risks related to legal proceedings, investigations or regulatory impacts on the crypto asset markets.
Notably, the sample comments focus on whether the company itself: is subject to a high risk of bankruptcy; is exposed to counterparties who have filed for, or have a high risk of, bankruptcy; and has taken any steps to safeguard customers’ crypto assets.
The Letter provides insight into the SEC staff’s expansive approach to cryptocurrency risk disclosure. While companies already must disclose financially material information to shareholders, the Letter provides concrete topics that likely will provide a basis for future cryptocurrency disclosure standards. This guidance also likely signals the beginning of an increased emphasis on consumer protection safeguards for cryptocurrency-related risks. While this likely will not be the only regulatory oversight the SEC provides over the coming months, it represents an initial step for securities regulators to bring digital asset transactions under the existing umbrella of protections employed for more traditional securities instruments.
Companies dealing with cryptocurrency assets should note the Letter’s request that companies utilize the sample comments when preparing documents “that may not typically be subject to review by the Division before their use.” This likely indicates a desire by the SEC for companies to preemptively comply with this guidance in all aspects of relevant financial disclosure, and could mitigate issues with SEC review of such documents post-use. Further, to the extent not already in place, companies should implement internal frameworks capable of providing consistent disclosure for all aspects of cryptocurrency-related involvement.
The Letter specifically asks companies to “discuss any steps you take to safeguard your customers’ crypto assets and describe any policies and procedures that are in place to prevent self-dealing and other potential conflicts of interest.” The consumer protection concerns raised in the Letter also could result in legislative attention, particularly in the aftermath of recent scandals and insolvencies, and drive future regulatory efforts requiring companies to develop such enhanced consumer safeguards.
1) Sample Letter to Companies Regarding Recent Developments in Crypto Asset Markets, Securities and Exchange Commission (Dec. 8, 2022).
2) SEC’s Gensler: The ‘runway is getting shorter’ for non-compliant crypto firms, Jennifer Schonberger, Yahoo Finance (Dec. 7, 2022).