Sample SEC comment letter on crypto market developments

The SEC issued an illustrative letter including example questions the staff is asking select issuers about their disclosures related to the direct or indirect impact of the recent bankruptcies and financial distress in the crypto asset markets. The questions are extensive, and include considerations related to potential counterparty exposures and various risks that may require disclosures in filings.

On December 8, 2022, the SEC’s Division of Corporation Finance issued an illustrative letter, A Sample Letter to Companies Regarding Recent Developments in Crypto Asset Markets, which contains sample comments that the Division may issue to companies depending on their particular facts and circumstances.

Key observations from the release and sample letter include:

• Companies should evaluate their disclosures with a view toward providing investors with:
  • specific, tailored disclosures about market events and conditions;
  • the company’s situation in relation to those events and conditions; and
  • the potential impact on investors.
• Companies with ongoing reporting obligations should consider whether their existing disclosures should be updated.
• Companies must disclose “such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading.”
• Companies should consider the need to address crypto asset market developments in their filings generally, including in their business descriptions, risk factors and MD&A.

To assist companies in meeting their disclosure obligations, the sample comments 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 sample comments do not address an exhaustive list of issues companies should consider. Companies should evaluate whether they have experienced or may be affected by matters characterized as potential risks and, if so, update their disclosures accordingly. The Division has urged companies to take the sample comments into consideration as they prepare disclosure documents that may not typically be subject to review by the Division before their use, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements.