On Dec. 8, 2022, the Securities and Exchange Commission’s (SEC) Division of Corporate Finance (the Division) posted a sample comment letter (the Letter) on its website that provides guidance to public companies regarding the “recent bankruptcies and financial distress among crypto asset market participants.” The Letter is available here.
The Letter is one of the Division’s first public steps addressing market uncertainty after the sudden, high-profile collapse and Chapter 11 bankruptcy filing of crypto trading platform FTX. The Letter also marks the Division’s entrance into providing explicit guidance on disclosure considerations related to the crypto markets.
In its guidance, the Division generally advises public companies to account for any crypto market developments material to an understanding of the company’s business, financial condition, results of operations or share price. The Division also notes that public companies should consider disclosing risks related to counterparty exposure; the company’s liquidity and ability to obtain financing; and risks related to legal proceedings, investigations or regulatory impacts in the crypto markets.
The Letter contains one general and 15 specific comments that SEC staff might send to public companies as part of its filing review process. The sample comments are broad, non-exhaustive and organized within the SEC’s standard disclosure categories:
- Description of Business
- Management Discussion and Analysis of Financial Condition (MD&A)
- Risk Factors
As stated in the Letter, the Division suggests companies discuss whether they have been exposed to crypto firms that have filed for bankruptcy, suspended withdrawals or experienced an excessive amount of withdrawals. The Division also encourages companies to outline the steps they are taking to secure customers’ crypto assets and whether the disruption in the crypto market has caused them “reputational harm.”
Although the Letter does not formally introduce new disclosure requirements, it does signal that the SEC is likely to further scrutinize the crypto markets and public disclosures related to these markets. Additionally, in light of the current public focus on crypto regulation and the wide range of comments in the Letter, it is also possible that the SEC will provide additional guidance for reporting companies in the near future. Companies preparing their public filings, particularly companies directly or indirectly affected by the recent developments in the crypto markets, should proactively consider updating disclosures based on the content of the Letter and latest developments in the crypto industry.