SEC Issues Guidance on Disclosure Requirements Associated with Cryptocurrency Markets | Balch & Bingham LLP

Federal law requires securities companies to disclose information relevant to investments in statements or reports. Additionally, companies must supplement this requested information with “such additional material information, if any, as may be necessary to make the requested representations, in the light of the circumstances under which they are being made, that are not misleading.” 17 CFR § 240.12b-20; id. § 230.408. The Sample Letter provides an example of what the Division may issue to companies regarding cryptocurrencies. It also provides a list of considerations for companies to determine whether they should address cryptocurrency market developments in their papers.

While not exhaustive, the list within the sample letter provides information on what the Division considers “material additional information” necessary to avoid misleading disclosures. The sample letter indicates that companies should consider the following when determining whether to supplement or update their disclosures:

  1. If “significant cryptocurrency market developments” could affect financial condition, results or share price, including the volatility of cryptocurrency prices;
  2. If and how failures within the cryptocurrency market could impact the company;
  3. If the company has direct or indirect exposures to market participants undergoing bankruptcy, excessive withdrawals or redemptions or non-compliance;
  4. Whether the company has safeguards for clients’ cryptographic assets and procedures to prevent self-negotiation and conflicts of interest;
  5. If the company holds cryptographic assets as collateral, has experienced excessive drawdowns or redemptions, or is exposed to potential effects on the company’s financial condition and liquidity from cryptographic assets.

The Sample Letter also provides a list of risk factors companies need to consider when making disclosures, including changes in regulatory developments, any reputational damage, and any gaps in risk management processes related to the cryptocurrency market. Firms should comprehensively evaluate the effect the cryptocurrency market could have on their business and determine whether additional disclosures to the SEC are needed to meet these reporting obligations.

This guidance, along with the SEC’s allegations against former FTX CEO Samuel Bankman-Fried, signal that the SEC intends to use its authority to regulate the cryptocurrency industry.

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