Disclosing Cryptocurrency Risks: SEC Comment Letter Puts ... - JD Supra

The U.S. Securities and Exchange Commission (SEC) Division of Corporation Finance (CorpFin) recently issued guidance (Guidance), including a “Dear Issuer” Sample Letter (Sample Letter) to assist companies in meeting their statutory disclosure obligations in light of the recent crypto downturn.
On December 8, 2022, in the midst of massive upheaval across crypto asset markets, CorpFin issued Guidance, together with a “Dear Issuer” Sample Letter, directed at companies with filing obligations under the Securities Act of 1933 and the Securities Exchange Act of 1934. The Guidance warns that the recent crypto asset downturn may require companies to disclose the direct or indirect material impact that such events may have on their business. The Sample Letter provides comments that CorpFin may send to companies during its selective review process of public filings. In sum, CorpFin urges companies to evaluate their current and ongoing public disclosures to better reflect crypto asset market exposure and risk.
Broadly, the Sample Letter advises that companies should be transparent regarding their crypto asset market exposure and include in any public disclosures their (i) exposure to third-party crypto market participants, (ii) risks related to liquidity or ability to obtain financing, (iii) risks related to “legal proceedings, investigations, or regulatory impacts” within the crypto markets, and (iv) reputational harm that may result from recent market disruption. While the Sample Letter does not provide an exhaustive list of issues, it does provide the following areas that companies should consider including in disclosures, to the extent such information is material:
General
Business Description
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Risk Factors
With this Guidance, CorpFin has indicated that for companies to meet their disclosure obligations, they must analyze whether developments in the crypto asset market materially affect their business such that their public filings generally, and their business descriptions, risk factors, and management’s discussion and analysis specifically, should be updated. The Sample Letter suggests that companies should be transparent with their filings and consider updating disclosures in light of information provided in prior disclosures. CorpFin further reminds companies that they are “responsible for the accuracy and adequacy” of their disclosures and that the actual details of disclosures depend on the companies’ particular facts and circumstances.
Taken together, the Guidance and Sample Letter serve as an indication of what CorpFin will focus on in its review of public filings. Further, they may also serve as a strong harbinger of what the SEC’s Division of Enforcement will be evaluating when deciding whether to bring disclosure-related enforcement actions.
BakerHostetler will continue to monitor this situation and other similar developments and will provide updates as appropriate.
[1] See Securities Act Rule 408 and Exchange Act Rule 12b-20, which provide that companies may need to make “such further material information as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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