The recent collapse of FTX and other companies transacting in cryptoassets prompted staff of the U.S. Securities and Exchange Commission to advise public reporting companies to double-check that they are adequately disclosing to investors any potential material adverse exposure they may have as a result of bankruptcy events and financial distress involving crypto intermediaries; recent cryptoasset price volatility, and other enumerated matters related to cryptoassets and cryptoasset business activities generally.

This advice was issued in the form of guidance by the SEC's Division of Corporation Finance (the "Division") on December 8, 2022. The advice relates to all forms of cryptoassets, not solely digital asset securities.

According to the guidance, companies with ongoing reporting obligations should be evaluating their current disclosures "with a view towards providing investors with specific, tailored disclosure about market events and conditions, the company's situation in relation to those events and conditions, and the potential impact on investors."

As part of its guidance, the Division published a sample letter that it might send to public companies setting forth some specific matters regarding which a company may wish to amend its disclosures. The sample letter refers to the following potential risks as well as others, and cautions that it is not intended to serve as an exhaustive list of potentially necessary crypto-centric disclosures:

  • any crypto market developments (including any bankruptcies of any entity in the cryptoasset markets) material to evaluating the company's business financial condition, results of operations or share price;
  • if material to the business, how the company secures customer assets and avoids "self-dealing and other potential conflicts of interest;"
  • to the extent material, any reputational harm the company may have to address in light of recent crypto market developments; and
  • any material risks to the company's business that may arise from the possibility of new regulatory developments.

Earlier this year, the SEC nearly doubled the size of its specialized Enforcement unit that handles crypto-related investigations, including matters alleging false disclosures.

In January 2021, the SEC's Division of Examinations provided insight into issues it had identified in the handling of digital asset securities by investment advisers, broker-dealers, and transfer agents in order to assist such entities with developing and enhancing their compliance procedures. As of October 2018, the National Futures Association adopted disclosure requirements for futures commission merchants, introducing brokers, commodity trading advisers and commodity pool operators involved with virtual currencies.

Lessons: All companies registered with the SEC in any capacity or who otherwise have public reporting obligations, and entities regulated by the Commodity Futures Trading Commission or the National Futures Association should consider the December 8 Division guidance in evaluating their required disclosures in connection with their cryptoasset activity.

SEC public reporting companies may view the guidance as a harbinger of future enforcement actions for misleading investors about risks stemming from cryptoasset market developments.

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