Federal law requires companies that issue securities to disclose information relevant to investments in statements or reports. In addition, companies must supplement these required disclosures with “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, which are not misleading.” 17 CFR § 240.12b-20; Identity card. § 230.408. The sample letter provides an example of what the Department might issue to companies related to crypto assets. It also provides a list of considerations for companies to decide whether they should address the development of the crypto asset market in their filings.
While not exhaustive, the list within the sample letter provides insight into what the Department considers “additional material information” necessary to prevent misleading disclosures. The sample letter indicates that companies should consider the following when deciding whether to supplement or update their disclosures:
- Whether “significant developments in the crypto-asset market” may affect financial conditions, results or share price, including volatility of crypto-asset prices;
- Can and how bankruptcies in the crypto asset market affect the company;
- Whether the company has direct or indirect exposure to market participants in bankruptcy, excessive withdrawals or redemptions or non-compliance;
- Whether the company has safeguards in place for customers’ crypto assets and procedures to prevent self-dealing and conflicts of interest;
- Whether the company holds crypto assets as collateral, has 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 that companies should consider when publishing, including changes in regulatory developments, any reputational damage and any deficiencies in risk management processes related to the crypto asset market. Companies should comprehensively evaluate the impact that the crypto asset market could have on their business and determine whether additional disclosures to the SEC are required to meet these reporting obligations.
These guidelines, along with the SEC’s charges against former FTX CEO Samuel Bankman-Fried, signal that the SEC intends to use its authority to regulate the crypto industry.