SEC Issues Guidance on Disclosure Obligations Associated with Crypto Asset Markets | Balch & Bingham LLP

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On December 8, 2022, the Corporate Finance Division within the Securities and Exchange Commission (“SEC”) issued guidance on disclosure obligations related to recent crypto asset market disruptions. The template letter to companies regarding recent developments in the crypto asset markets is intended to improve compliance with disclosure obligations under SEC regulations.

Federal law requires securities issuers to disclose investment information in filings or reports. In addition, companies must supplement this required information with “any other material information, if any, that may be necessary to make the required statements, in light of the circumstances in which they are made, not misleading.” 17 CFR § 240.12b-20; Identifier. § 230.408. The sample letter provides an example of what the Division might issue to companies regarding crypto assets. It also provides a list of considerations for companies to consider whether they should factor market developments in crypto assets into their filings.

Although not exhaustive, the list in the sample letter provides an overview of what the Division considers “other material information” necessary to avoid misleading disclosures. The sample letter indicates that companies should consider the following points when deciding to add or update their information:

If “material crypto asset market movement” could affect financial conditions, results or the price of the stock, including the volatility of the price of crypto assets; If and how bankruptcies in the crypto asset market could impact the business; Whether the business has direct or indirect exposures to failed market participants, excessive withdrawals or redemptions, or compliance failures; Whether the company has safeguards in place for customer crypto assets and procedures to prevent personal dealings and conflicts of interest; Whether the company holds crypto assets as collateral, has experienced excessive withdrawals or redemptions, or is exposed to potential effects on the company’s financial condition and liquidity due to crypto assets.

The template letter also provides a list of risk factors for companies to consider when disclosing, including changes in regulatory developments, any reputational damage and any gaps in risk management processes related to crypto assets market. Companies should thoroughly evaluate the effect the crypto asset market could have on their business and determine if additional SEC filings are required to meet these reporting obligations.

This guidance, coupled with the SEC’s accusations against former FTX CEO Samuel Bankman-Fried, indicates that the SEC intends to use its authority to regulate the crypto industry.

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