The Division of Corporation Finance of the Securities and Exchange Commission (“SEC”) issued a sample letter on December 8, 2022, highlighting considerations that public companies that are in, or connected to, the crypto industry should keep in mind as they prepare their public disclosures, spanning the description of business, management’s discussion and analysis (“MD&A”) and risk factor disclosures.
What Public Companies Need to Consider
While the letter highlights additional points for consideration in the business and MD&A sections, the majority of the comments focus on risk factor disclosure, flagging nine key risks, including:
- any material gaps identified with respect to risk management processes and policies,
- the “possibility of regulatory developments related to crypto assets and crypto asset markets,” and
- material risk of reputational harm from recent disruptions.
Additionally, the sample letter also calls for increased disclosure regarding whether any of the crypto assets held or issued by the company serve as collateral for certain activities, as well as any downstream effects experienced by the company as a result of certain bankruptcies in the crypto industry. The sample letter gives insights into general themes of disclosures that the SEC is focused on, including the following: (i) the risk exposure a company has to other actors in the blockchain and cryptocurrency ecosystem (interdependencies within the industry), and (ii) changes to the value of assets held by the company resulting from fluctuations in the larger blockchain market.
In light of the heightened scrutiny faced by companies with exposure to the crypto industry, careful consideration should be given to any public disclosures regarding their operations in order to address the SEC’s concerns of providing adequate information to make a company’s public disclosures not misleading.
Contact Alice Hsu, Daniel Forester, Joseph Perkins or Soo Hwang for guidance on whether your company could be impacted or if you have any questions about navigating this evolving regulatory landscape.