In December of 2022, the staff of the SEC’s Division of Corporation Finance issued a sample comment letter highlighting matters related to crypto assets, markets, and exposure that registrants should consider when preparing disclosures in connection with their periodic filings and securities offerings. The SEC selectively reviews filings made under the Securities Act of 1933 and the Securities Exchange Act of 1934 to monitor and enhance compliance with applicable disclosure requirements. The sample comment letter provides a number of sample comments that the Division might issue to companies in connection with the staff’s review of such filings.
The guidance comes on the heels of notable recent scandals and insolvencies in the cryptocurrency industry. Although many of the comments will be most relevant to companies that do business in the crypto space, including companies that issue, hold, buy or sell crypto assets, every issuer should consider whether they are or may be materially impacted by developments in the crypto asset market, including whether they or their customers are impacted by any downstream effects of bankruptcies or financial distress of crypto market participants or by any devaluation of crypto assets.
The letter has four sections:
• Description of Business
• Management’s Discussion and Analysis of Financial Condition and Results of Operations
• Risk Factors
Companies should disclose generally any significant crypto asset market developments material to understanding or assessing their business, financial condition, and results of operations. Accordingly, the list includes comments regarding such things as 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.
The illustrative letter contains sample comments that the SEC may issue to companies depending on their particular facts and circumstances. The sample comments included in the letter are not an exhaustive list of the issues that companies should consider. Companies should evaluate whether they have experienced or may be affected by matters characterized as potential risks and, if so, update their disclosures accordingly. A copy of the SEC’s sample letter is attached.
SEC’s Sample Letter to Companies Regarding Recent Developments in Crypto Asset Markets
We have reviewed your filing and have the following comments. Please revise or update your disclosure in response to our comments.
1. Provide disclosure of any significant crypto asset market developments material to understanding or assessing your business, financial condition and results of operations, or share price since your last reporting period, including any material impact from the price volatility of crypto assets.
Description of Business
2. To the extent material, discuss how the bankruptcies of XX and XX and the downstream effects of those bankruptcies have impacted or may impact your business, financial condition, customers, and counterparties, either directly or indirectly. Clarify whether you have material assets that may not be recovered due to the bankruptcies or may otherwise be lost or misappropriated.
3. If material to an understanding of your business, describe any direct or indirect exposures to other counterparties, customers, custodians, or other participants in crypto asset markets known to:
- Have filed for bankruptcy, been decreed insolvent or bankrupt, made any assignment for the benefit of creditors, or have had a receiver appointed for them.
- Have experienced excessive redemptions or suspended redemptions or withdrawals of crypto assets.
- Have the crypto assets of their customers unaccounted for.
- Have experienced material corporate compliance failures.
4. If material to an understanding of your business, 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. Describe any policies and procedures you have regarding the commingling of assets, including customer assets, your assets, and those of affiliates or others. Identify what material changes, if any, have been made to your processes in light of the current crypto asset market disruption.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
5. Disclose whether you have experienced excessive redemptions or withdrawals, or have suspended redemptions or withdrawals, of crypto assets and explain the potential effects on your financial condition and liquidity.
6. We note that you own or have issued crypto assets and/or hold crypto assets on behalf of third parties. To the extent material, explain whether these crypto assets serve as collateral for any loan, margin, rehypothecation, or other similar activities to which you or your affiliates are a party. If so, identify and quantify the crypto assets used in these financing arrangements and disclose the nature of your relationship for loans with parties other than third-parties. State whether there are any encumbrances on the collateral. Discuss whether the current crypto asset market disruption has affected the value of the underlying collateral.
7. To the extent material, explain whether, to your knowledge, crypto assets you have issued serve as collateral for any other person’s or entity’s loan, margin, rehypothecation or similar activity. If so, discuss whether the current crypto asset market disruption has impacted the value of the underlying collateral and explain any material financing and liquidity risk this raises for your business.
8. Describe any material risk to you, either direct or indirect, due to excessive redemptions, withdrawals, or a suspension of redemptions or withdrawals, of crypto assets. Identify any material concentrations of risk and quantify any material exposures.
9. To the extent material, discuss any reputational harm you may face in light of the recent disruption in the crypto asset markets. For example, discuss how market conditions have affected how your business is perceived by customers, counterparties, and regulators, and whether there is a material impact on your operations or financial condition.
10. We note that you are not authorized or permitted to offer your products and services to customers outside of the jurisdictions where you have obtained the required governmental licenses and authorizations. Describe any material risks you face from unauthorized or impermissible customer access to your products and services outside of those jurisdictions. Describe any steps you take to restrict access of U.S. persons to your products and services and any related material risks.
11. Describe any material risks to your business from the possibility of regulatory developments related to crypto assets and crypto asset markets. Identify material pending crypto legislation or regulation and describe any material effects it may have on your business, financial condition, and results of operations.
12. Describe any material risks you face related to the assertion of jurisdiction by U.S. and foreign regulators and other government entities over crypto assets and crypto asset markets.
13. Describe any material risks related to safeguarding your, your affiliates’, or your customers’ crypto assets. Describe any material risks to your business and financial condition if your policies and procedures surrounding the safeguarding of crypto assets, conflicts of interest, or comingling of assets are not effective.
14. To the extent material, describe any gaps your board or management have identified with respect to risk management processes and policies in light of current crypto asset market conditions as well as any changes they have made to address those gaps.
15. Describe any material financing, liquidity, or other risks you face related to the impact that the current crypto asset market disruption has had, directly or indirectly, on the value of the crypto assets you use as collateral or the value of your crypto assets used by others as collateral.
16. To the extent material, describe any of the following risks due to disruptions in the crypto asset markets:
- Risk from depreciation in your stock price.
- Risk of loss of customer demand for your products and services.
- Financing risk, including equity and debt financing.
- Risk of increased losses or impairments in your investments or other assets.
- Risks of legal proceedings and government investigations, pending or known to be threatened, in the United States or in other jurisdictions against you or your affiliates.
- Risks from price declines or price volatility of crypto assets
We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.
Division of Corporation Finance
The statements in this guidance represent the views of the staff of the Division of Corporation Finance. This guidance is not a rule, regulation, or statement of
the Securities and Exchange Commission (the “Commission”). The Commission has neither approved nor disapproved its content. This guidance, like all staff
guidance, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person.