On December 8, 2022, the Staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (“SEC”) posted a sample comment letter with illustrative questions for reporting companies to consider in preparing their Securities Act and Exchange Act disclosure. The sample comments focus specifically on the impact that “[r]ecent bankruptcies and financial distress among crypto market participants” may have on reporting companies. The Staff stressed the need for reporting companies that may be impacted to provide “specific, tailored disclosure” about current events and their impact on the business and flagged the potential need to update existing disclosures.
The Staff noted that the sample comment letter is merely illustrative and includes examples of comments the Staff may issue. Given the recent volatility in the crypto asset markets, including the bankruptcy of FTX, as well as substantial press coverage, reporting companies with direct or indirect exposure to cryptocurrency assets or markets should consider assessing their public disclosures in light of the concerns the Staff has raised.
The sample comment letter includes an assortment of potential comments related to crypto asset markets and their impact on reporting companies. The comments are organized based on the principal sections of a reporting company’s disclosure. Included below is a summary of the key areas of focus:
Description of Business
The sample comment letter asks reporting companies to consider adding or updating disclosure related to:
- If material, the impact, both direct and indirect, that recent bankruptcies of crypto asset exchanges have had on the reporting company’s business.
- The reporting company’s exposures to counterparties, customers, custodians, or other participants in the crypto asset markets who are known to have experienced distress due to recent volatility in crypto asset markets.
- Measures taken to safeguard customers’ cryptocurrency assets and policies to address potential conflicts of interest related to such assets.
MD&A
The sample comment letter asks reporting companies to consider adding or updating disclosure related to:
- The occurrence of excessive redemptions or withdrawals, or the suspension of redemptions or withdrawals, of crypto assets and the related impact on the reporting company’s financial condition and liquidity.
- Whether crypto assets held by the reporting company serve as collateral for any debt facilities to which the reporting company or its affiliates are a party.
- Whether crypto assets issued by the reporting company serve as collateral for a third party’s debt, the impact of the volatility in the crypto asset markets on the value of that collateral, and the related impact on the reporting company’s access to liquidity.
Risk Factors
The sample comment letter asks reporting companies to consider adding or updating disclosures related to:
- Direct or indirect risks due to excessive redemptions, withdrawals, or a suspension of redemptions or withdrawals of crypto assets.
- Reputational harm in light of the recent disruption in the crypto asset markets.
- Risks to the business conducting operations in jurisdictions without required government licensure.
- Identification of gaps related to risk management processes and policies in view of current crypto asset market conditions and subsequent measures taken by the board or management.
- Impact on the business from the potential further regulation of crypto asset markets.
- Risks related to the failure to safeguard client assets.
- The impact of the decline in value of crypto market assets on financing or liquidity.
- Risks to the business from disruptions in crypto asset markets.
Final Thoughts
Cryptocurrency assets and cryptocurrency markets, and the impact of recent distress within the cryptocurrency space are top of mind for the Staff. Reporting companies would be well served to take stock of where and how their operations, financing and compliance functions are impacted by crypto markets and assets, and to consider, as we head into annual report season, whether updates are required in their business description, risk factors, and MD&A.
