On May 6, 2022, the SEC announced that it settled charges against technology company NVIDIA Corporation for inadequate disclosures regarding the impact of cryptomining on NVIDIA's gaming business.

NVIDIA is a technology company that, among things, designs and markets graphic processing units (GPUs) for gaming. Beginning in NVIDIA's fiscal year 2018, as certain crypto assets saw significant price increases, the company's gaming GPUs became popular for cryptomining. Cryptomining is the process of receiving crypto assets in exchange for verifying other crypto transactions on distributed ledgers.

The increased demand for NVIDIA's gaming GPUs for the purpose of cryptomining contributed to a significant change to NVIDIA's total and gaming revenues in fiscal year 2018 compared to the prior year. NVIDIA's revenue from its gaming business increased 52% year-over-year for Q2 2018 and 25% year-over-year for Q3 2018. While NVIDIA could not track specifically which gaming GPUs were being purchased for cryptomining, company personnel estimated that it was a significant factor in the year-over-year revenue growth.

The SEC charged NVIDIA with Securities Act and Exchange Act violations as a result of:

Specifically, the SEC's order cites to material omissions about the impact of cryptomining in NVIDIA's MD&A discussion on the results of its business operations, as required by then Item 303(b)(2) (now Item 303(c)(2)) of Regulation S-K. Despite analyst and investor interest in understanding the impact of cryptomining on NVIDIA's gaming revenue, the MD&A section of NVIDIA's Forms 10-Q for Q2 and Q3 2018 failed to disclose that cryptomining was a significant factor in the material year-over-year revenue growth. It wasn't until NVIDIA's Form 10-K for fiscal year 2018 that the company identified cryptomining as a factor in its revenue growth and crypto price volatility as a risk to the company's results of operations.

In addition, NVIDIA is required by Exchange Act Rule 13a-15(a) to maintain disclosure controls and procedures. Since NVIDIA had information indicating that cryptomining was a significant factor in the year-over-year revenue growth and failed to disclose it, the SEC charged NVIDIA for failing to maintain disclosure controls and procedures designed to ensure that information required to be disclosed was reported in NVIDIA's quarterly reports.

NVIDIA did not admit or deny the SEC's findings but agreed to settle the charges for a $5.5 million penalty.

The investigation into NVIDIA was conducted by the SEC's Crypto Asset and Cyber Unit, which has mostly focused its investigations on securities laws violations related to fraudulent and unregistered crypto asset offerings and platforms. However, NVIDIA's settlement serves as a warning to public companies with exposure to crypto markets and market participants that they are also being watched by the group, which the SEC recently nearly doubled in size (see Legal Update, SEC Expands Crypto Enforcement Staff). Reporting companies whose products, services, or business activities are impacted by crypto markets should ensure all material risks to and impacts on their operations are identified and properly disclosed.

For more information on MD&A disclosure requirements, see Practice Note, Preparation of Management's Discussion and Analysis of Financial Condition and Results of Operations and MD&A Checklist: What Every Lawyer Needs to Ask.

For more on the periodic reporting obligations of public companies, see Practice Note, Periodic Reporting and Disclosure Obligations: Overview.