On December 8, 2022, the Division of Corporation Finance within the Securities and Exchange Commission (“SEC”) published guidance on disclosure obligations related to recent disruptions in the crypto asset market. The Sample Letter to Companies Regarding Recent Developments in Crypto Asset Markets aims to improve compliance with disclosure obligations under SEC regulations.
Federal law requires security issuing companies to disclose information relevant to investments in statements or reports. Additionally, companies must supplement these required disclosures with “such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading.” 17 C.F.R. § 240.12b-20; Id. § 230.408. The Sample Letter provides an example of what the Division could issue to companies concerning crypto assets. It also provides a list of considerations for companies to determine whether they should address crypto asset market developments in their filings.
Though non-exhaustive, the list within the sample letter provides insight into what the Division considers “further material information” necessary to prevent misleading disclosures. The Sample Letter indicates that companies should give thought to the following when determining whether to supplement or update their disclosures:
- Whether “significant crypto asset market developments” could affect financial conditions, results, or share price, including crypto asset price volatility;
- Whether and how bankruptcies within the crypto asset market could impact the company;
- Whether the company has direct or indirect exposures to participants in the market undergoing bankruptcy, excessive withdrawals or redemptions, or compliance failures;
- Whether the company has safeguards in place for customers’ crypto assets and procedures to prevent self-dealing and conflicts of interests;
- Whether the company holds crypto assets as collateral, experienced excessive withdrawals or redemptions, or is exposed to potential effects on the company’s financial condition and liquidity due to crypto assets.
The Sample Letter also provides a list of risk factors for companies to consider when making disclosures, including changes in regulatory developments, any reputational harm, and any gaps in risk management processes related to the crypto asset market. Companies should comprehensively evaluate the effect that the crypto asset market could have on their business and determine whether additional disclosures to the SEC are necessary to meet these reporting obligations.
This guidance, coupled with the SEC charges against former FTX CEO, Samuel Bankman-Fried, signals that the SEC intends to use its authority to regulate the crypto industry.