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SEC Releases Sample Letter Regarding Recent Developments in Crypto Asset Markets
Practical Law Legal Update w-037-8829 (Approx. 5 pages)
SEC Releases Sample Letter Regarding Recent Developments in Crypto Asset Markets
by Practical Law Corporate & Securities.
| Published on 09 Dec 2022 • USA (National/Federal) |
The SEC's Division of Corporation Finance released a sample letter containing illustrative comments that the Division may issue to companies regarding their disclosure obligations related to the impact that recent developments in crypto asset markets may have on their businesses.
On December 8, 2022, the Division of Corporation Finance (Division) of the Securities and Exchange Commission (SEC) released a sample letter containing illustrative comments that the Division may issue to companies regarding their disclosure obligations in filings under the Securities Act of 1933, as amended (Securities Act), or the Securities Exchange Act of 1934, as amended (Exchange Act), related to the direct or indirect effects that recent developments and events in crypto asset markets have had or may have on the companies' businesses. The Division cited recent bankruptcies and financial distress among crypto asset market participants that have caused disruptions in the markets.
The Division may issue some or all of the comments contained in the sample letter to companies depending on their particular facts and circumstances, and any comments issued will be tailored to the specific company and/or transaction. The Division said that companies should consider the need to address crypto asset market developments in their Securities Act or Exchange Act filings generally, including in their business descriptions, risk factors, and management's discussion and analysis.
A comment letter issued to a company regarding a Securities Act or Exchange Act filing and including comments based on those in the sample letter, will request that the company, in response to the comments, revise or update its disclosure as follows:
General
- Provide disclosure of any significant crypto asset market developments material to the company's business, financial condition, results of operations, or share price since its last reporting period.
- Include a description of any material impact of the price volatility of crypto assets.
Description of Business
- Discuss, to the extent material, how certain bankruptcies in the crypto asset market and the downstream effects of those bankruptcies have affected or may affect the company's business, including whether the company has any material assets that may not be recovered due to the bankruptcies or otherwise be lost.
- If material, describe any direct or indirect exposures to other counterparties, customers, custodians, or other crypto asset market participants known to have:
- filed for bankruptcy, been declared insolvent or bankrupt, made any assignment for the benefit of creditors, or had a receiver appointed;
- experienced excessive redemptions or suspended redemptions or withdrawals of crypto assets;
- had crypto assets for customers unaccounted for; or
- experienced material corporate compliance failures.
- If material, describe steps the company takes to safeguard its customers' crypto assets; any policies and procedures in place to prevent self-dealing and other potential conflicts of interest or regarding commingling of assets of the company, customers, affiliates, and others; and any material changes in the company's processes in light of the current crypto asset market disruption.
Management's Discussion and Analysis of Financial Condition and Results of Operations
- Disclose whether the company has experienced excessive redemptions or withdrawals or has suspended redemptions or withdrawals of crypto assets, and explain potential effects.
- To the extent material, explain whether crypto assets the company owns, has issued, or holds on behalf of third parties serve as collateral for any loan, margin, rehypothecation, or other similar activities; if so, identify and quantify any crypto assets used in these financing arrangements; state whether there are any encumbrances on the collateral; whether the current market disruption has affected the value of the collateral; and, if material, provide similar disclosure for any crypto assets issued by the company that serve as collateral for any other person' s transactions.
Risk Factors
- Describe any material direct or indirect risk to the company due to excessive redemptions or withdrawals or any suspension of redemptions or withdrawals of crypto assets; and identify material concentrations of risk and quantify material exposures.
- Discuss any material reputational harm the company may face in light of the current crypto asset market disruption.
- Identify any material risks from unauthorized or impermissible customer access to the company's products and services outside of jurisdictions for which it has obtained required governmental licenses and authorizations, and describe any steps taken to restrict US persons' access to the company's products and services, and any material risks.
- Describe any material risks to the company's business from potential US and non-US regulatory actions or pending legislation related to crypto assets and crypto asset markets.
- Describe any material risks related to safeguarding the company's, its customers' and its affiliates' crypto assets.
- Identify any material gaps in risk management processes related to crypto asset markets and describe steps taken to mitigate.
- Describe any material financing, liquidity, or other risks the company faces related to the impact of current crypto market disruptions on crypto assets used as collateral by the company or others.
- If material, describe any of the following risks due to crypto asset markets disruptions:
- depreciation of the company's stock price;
- loss of customer demand for products and services;
- equity and debt financing risk;
- increased losses or impairments in the company's investments or other assets;
- pending or threatened legal proceedings and government investigations; or
- price declines or price volatility of crypto assets.
For more information on crypto asset markets in general, see Crypto Toolkit and Legal Updates, SEC's Divisions of Enforcement and Trading and Markets Issue Statement on Cryptocurrency Exchanges.
For more information on the SEC's review of company filings, see Practice Notes, Registration Process: SEC Review and SEC Review of Periodic Reports. For a collection of Practical Law resources covering the reporting and disclosure obligations for public companies generally, see Periodic Reporting Requirements and Disclosure Obligations Toolkit (Domestic Issuers) and Periodic Reporting Requirements and Disclosure Obligations Toolkit (Foreign Private Issuers).