The employees of the SEC’s Division of Company Finance (Division) on December 8, 2022 launched steering for corporations issuing securities in an illustrative letter, entitled “Pattern Letter to Corporations Concerning Current Developments in Crypto Asset Markets” (Letter).1 The Letter gives a lot of pattern feedback that the Division would possibly difficulty to corporations in reference to the employees’s evaluation of sure filings below relevant securities legal guidelines. The feedback included within the Letter give attention to offering traders with particular, tailor-made disclosure relating to an organization’s involvement with cryptocurrency and different digital belongings, along with related danger elements.
This steering comes on the heels of notable current scandals and insolvencies within the cryptocurrency trade. SEC Chair Gary Gensler lately addressed cryptocurrency considerations within the wake of those occasions, calling on cryptocurrency corporations to “come into compliance with the legislation.”2 The Letter discusses potential disclosure situations, and asks corporations to element how such situations could have an effect on their operations.
Steerage
This steering might be relevant for SEC-registered corporations relating to disclosure paperwork resembling “robotically efficient registration statements and prospectus dietary supplements for takedowns from present shelf registration statements;” corporations exempt from registration necessities additionally ought to contemplate the SEC’s positions within the Letter.
Along with asking corporations to reveal typically “any important crypto asset market developments materials to understanding or assessing [their] enterprise, monetary situation and outcomes of operations,” the Letter gives a selected, although non-exhaustive, checklist of pattern feedback specializing in the fabric impacts of crypto asset market developments, which might embody: an organization’s publicity to counterparties and different market members; dangers associated to an organization’s liquidity and skill to acquire financing; and dangers associated to authorized proceedings, investigations or regulatory impacts on the crypto asset markets.
Notably, the pattern feedback give attention to whether or not the corporate itself: is topic to a excessive danger of chapter; is uncovered to counterparties who’ve filed for, or have a excessive danger of, chapter; and has taken any steps to safeguard clients’ crypto belongings.
Takeaways
The Letter gives perception into the SEC employees’s expansive strategy to cryptocurrency danger disclosure. Whereas corporations already should disclose financially materials data to shareholders, the Letter gives concrete matters that doubtless will present a foundation for future cryptocurrency disclosure requirements. This steering additionally doubtless alerts the start of an elevated emphasis on shopper safety safeguards for cryptocurrency-related dangers. Whereas this doubtless is not going to be the one regulatory oversight the SEC gives over the approaching months, it represents an preliminary step for securities regulators to deliver digital asset transactions below the present umbrella of protections employed for extra conventional securities devices.
Corporations coping with cryptocurrency belongings ought to notice the Letter’s request that corporations make the most of the pattern feedback when getting ready paperwork “that won’t sometimes be topic to evaluation by the Division earlier than their use.” This doubtless signifies a need by the SEC for corporations to preemptively adjust to this steering in all elements of related monetary disclosure, and will mitigate points with SEC evaluation of such paperwork post-use. Additional, to the extent not already in place, corporations ought to implement inner frameworks able to offering constant disclosure for all elements of cryptocurrency-related involvement.
The Letter particularly asks corporations to “focus on any steps you are taking to safeguard your clients’ crypto belongings and describe any insurance policies and procedures which might be in place to stop self-dealing and different potential conflicts of curiosity.” The buyer safety considerations raised within the Letter additionally might end in legislative consideration, notably within the aftermath of current scandals and insolvencies, and drive future regulatory efforts requiring corporations to develop such enhanced shopper safeguards.
Footnotes:
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).
