SEC Division of Corporation Finance Reveals Sample Letter Sent to Companies on Crypto Asset Disclosure

The Securities and Exchange Commission (SEC), Division of Corporate Finance, has revealed a sample letter sent to reporting companies regarding disclosure requirements under securities laws. The letter addresses digital assets, or crypto assets, and points to recent events in crypto markets, such as bankruptcies and “financial distress” within crypto markets.

The Division of Corporation Finance states that companies with ongoing reporting obligations should consider if their existing disclosure should be updated.

The Division states:

“In meeting their disclosure obligations, companies should consider the need to address crypto asset market developments in their filings generally, including in their business descriptions, risk factors, and management’s discussion and analysis. To assist companies in meeting these obligations, the sample comments below focus on the need for clear disclosure about the material impacts of crypto asset market developments, which may include a company’s exposure to counterparties and other market participants; risks related to a company’s liquidity and ability to obtain financing; and risks related to legal proceedings, investigations, or regulatory impacts in the crypto asset markets.”

The published sample is describes as not being an exhaustive list of items companies should consider, leaving disclosure a bit open-ended.  The Division encourages companies to contact the industry office responsible for the company’s filings with any questions regarding the company’s proposed disclosure.

Crypto contagion that started this past summer and has continued with vigor – most recently with the bankruptcy of FTX, has rattled policymakers as well as regulators assigned to monitor markets.  Under current leadership, the SEC has stated that just about all cryptocurrencies are securities  and crypto exchanges should register with the Commission.

The sample letter, as of today, is republished below.

December 2022


Dear Issuer:

We have reviewed your filing and have the following comments. Please revise or update your disclosure in response to our comments.


    1. Provide disclosure of any significant crypto asset market developments material to understanding or assessing your business, financial condition and results of operations, or share price since your last reporting period, including any material impact from the price volatility of crypto assets.

Description of Business

    1. To the extent material, discuss how the bankruptcies of XX and XX and the downstream effects of those bankruptcies have impacted or may impact your business, financial condition, customers, and counterparties, either directly or indirectly.  Clarify whether you have material assets that may not be recovered due to the bankruptcies or may otherwise be lost or misappropriated.
    1. If material to an understanding of your business, describe any direct or indirect exposures to other counterparties, customers, custodians, or other participants in crypto asset markets known to:
      • Have filed for bankruptcy, been decreed insolvent or bankrupt, made any assignment for the benefit of creditors, or have had a receiver appointed for them.
      • Have experienced excessive redemptions or suspended redemptions or withdrawals of crypto assets.
      • Have the crypto assets of their customers unaccounted for.
      • Have experienced material corporate compliance failures.
    1. If material to an understanding of your business, discuss any steps you take to safeguard your customers’ crypto assets and describe any policies and procedures that are in place to prevent self-dealing and other potential conflicts of interest.  Describe any policies and procedures you have regarding the commingling of assets, including customer assets, your assets, and those of affiliates or others.  Identify what material changes, if any, have been made to your processes in light of the current crypto asset market disruption.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    1. Disclose whether you have experienced excessive redemptions or withdrawals, or have suspended redemptions or withdrawals, of crypto assets and explain the potential effects on your financial condition and liquidity.
    1. We note that you own or have issued crypto assets and/or hold crypto assets on behalf of third parties.  To the extent material, explain whether these crypto assets serve as collateral for any loan, margin, rehypothecation, or other similar activities to which you or your affiliates are a party.  If so, identify and quantify the crypto assets used in these financing arrangements and disclose the nature of your relationship for loans with parties other than third-parties.  State whether there are any encumbrances on the collateral.  Discuss whether the current crypto asset market disruption has affected the value of the underlying collateral.
    1. To the extent material, explain whether, to your knowledge, crypto assets you have issued serve as collateral for any other person’s or entity’s loan, margin, rehypothecation or similar activity.  If so, discuss whether the current crypto asset market disruption has impacted the value of the underlying collateral and explain any material financing and liquidity risk this raises for your business.

Risk Factors

    1. Describe any material risk to you, either direct or indirect, due to excessive redemptions, withdrawals, or a suspension of redemptions or withdrawals, of crypto assets.  Identify any material concentrations of risk and quantify any material exposures.
    1. To the extent material, discuss any reputational harm you may face in light of the recent disruption in the crypto asset markets.  For example, discuss how market conditions have affected how your business is perceived by customers, counterparties, and regulators, and whether there is a material impact on your operations or financial condition.
    1. We note that you are not authorized or permitted to offer your products and services to customers outside of the jurisdictions where you have obtained the required governmental licenses and authorizations.  Describe any material risks you face from unauthorized or impermissible customer access to your products and services outside of those jurisdictions.  Describe any steps you take to restrict access of U.S. persons to your products and services and any related material risks.
    1. Describe any material risks to your business from the possibility of regulatory developments related to crypto assets and crypto asset markets.  Identify material pending crypto legislation or regulation and describe any material effects it may have on your business, financial condition, and results of operations.
    1. Describe any material risks you face related to the assertion of jurisdiction by U.S. and foreign regulators and other government entities over crypto assets and crypto asset markets.
    1. Describe any material risks related to safeguarding your, your affiliates’, or your customers’ crypto assets. Describe any material risks to your business and financial condition if your policies and procedures surrounding the safeguarding of crypto assets, conflicts of interest, or comingling of assets are not effective.
    1. To the extent material, describe any gaps your board or management have identified with respect to risk management processes and policies in light of current crypto asset market conditions as well as any changes they have made to address those gaps.
    1. Describe any material financing, liquidity, or other risks you face related to the impact that the current crypto asset market disruption has had, directly or indirectly, on the value of the crypto assets you use as collateral or the value of your crypto assets used by others as collateral.
    1. To the extent material, describe any of the following risks due to disruptions in the crypto asset markets:
      • Risk from depreciation in your stock price.
      • Risk of loss of customer demand for your products and services.
      • Financing risk, including equity and debt financing.
      • Risk of increased losses or impairments in your investments or other assets.
      • Risks of legal proceedings and government investigations, pending or known to be threatened, in the United States or in other jurisdictions against you or your affiliates.
      • Risks from price declines or price volatility of crypto assets.

We remind you that the company and its management are responsible for the accuracy
and adequacy of their disclosures, notwithstanding any review, comments, action or absence of
action by the staff.


Division of Corporation Finance

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