The workers of the SEC’s Division of Company Finance (Division) on December 8, 2022 launched steerage for firms issuing securities in an illustrative letter, entitled “Pattern Letter to Firms Concerning Current Developments in Crypto Asset Markets” (Letter).1 The Letter offers numerous pattern feedback that the Division would possibly problem to firms in reference to the workers’s assessment of sure filings underneath relevant securities legal guidelines. The feedback included within the Letter concentrate on offering buyers with particular, tailor-made disclosure concerning an organization’s involvement with cryptocurrency and different digital belongings, along with related danger elements.
This steerage comes on the heels of notable current scandals and insolvencies within the cryptocurrency trade. SEC Chair Gary Gensler just lately addressed cryptocurrency considerations within the wake of those occasions, calling on cryptocurrency firms to “come into compliance with the regulation.”2 The Letter discusses potential disclosure eventualities, and asks firms to element how such eventualities might have an effect on their operations.
Steering
This steerage can be relevant for SEC-registered firms concerning disclosure paperwork resembling “routinely efficient registration statements and prospectus dietary supplements for takedowns from current shelf registration statements;” firms exempt from registration necessities additionally ought to take into account the SEC’s positions within the Letter.
Along with asking firms to reveal usually “any important crypto asset market developments materials to understanding or assessing [their] enterprise, monetary situation and outcomes of operations,” the Letter offers a selected, although non-exhaustive, checklist of pattern feedback specializing in the fabric impacts of crypto asset market developments, which may embrace: an organization’s publicity to counterparties and different market individuals; dangers associated to an organization’s liquidity and talent to acquire financing; and dangers associated to authorized proceedings, investigations or regulatory impacts on the crypto asset markets.
Notably, the pattern feedback concentrate on 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 offers perception into the SEC workers’s expansive strategy to cryptocurrency danger disclosure. Whereas firms already should disclose financially materials data to shareholders, the Letter offers concrete matters that probably will present a foundation for future cryptocurrency disclosure requirements. This steerage additionally probably indicators the start of an elevated emphasis on shopper safety safeguards for cryptocurrency-related dangers. Whereas this probably won’t be the one regulatory oversight the SEC offers over the approaching months, it represents an preliminary step for securities regulators to deliver digital asset transactions underneath the prevailing umbrella of protections employed for extra conventional securities devices.
Firms coping with cryptocurrency belongings ought to word the Letter’s request that firms make the most of the pattern feedback when making ready paperwork “that won’t sometimes be topic to assessment by the Division earlier than their use.” This probably signifies a want by the SEC for firms to preemptively adjust to this steerage in all features of related monetary disclosure, and will mitigate points with SEC assessment of such paperwork post-use. Additional, to the extent not already in place, firms ought to implement inner frameworks able to offering constant disclosure for all features of cryptocurrency-related involvement.
The Letter particularly asks firms to “talk about any steps you are taking to safeguard your clients’ crypto belongings and describe any insurance policies and procedures which might be in place to forestall self-dealing and different potential conflicts of curiosity.” The buyer safety considerations raised within the Letter additionally may end in legislative consideration, significantly within the aftermath of current scandals and insolvencies, and drive future regulatory efforts requiring firms 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).