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New SEC Guidance on Crypto Disclosures

Business

U.S. Securities and Exchange Commission Seal | Image by REUTERS

On December 8, the Securities and Exchange Commission released a sample letter urging security-issuing companies to disclose their exposure to the cryptocurrency market.

News of the guidance comes on the heels of the massive blow-up of one of the largest crypto exchanges in the world, FTX, headed by CEO Sam Bankman-Fried. Bankman-Fried was arrested on December 12 in the Bahamas, and will likely be extradited to the United States to face trial on fraud charges.

Last month, after the CEO of FTX rival Binance announced the firm would be selling off all FTT tokens — a cryptocurrency developed by FTX — the digital coin’s value plummeted. Amid the price drop, clients of FTX began withdrawing funds from the platform, initiating a run on the exchange.

Soon, FTX was inundated with redemption requests, so much so that the company placed restrictions on withdrawals on November 8. Later, it became clear that the issue plaguing the exchange was more than a traditional bank run, and allegations of serious mismanagement and misconduct began to surface.

As a result, on November 11, Bankman-Fried stepped down as CEO, and the companies he managed, including FTX, filed for bankruptcy.

Talking to The New York Times last month, Bankman-Fried admitted the firm failed its clients. “We lost track of a really important part of the business and of the product. And so there absolutely were management failures, huge management failures. I bear responsibility for that,” said Bankman-Fried.

Now, U.S. regulators are taking the opportunity to clean up an industry reminiscent of the Wild West.

In early December, SEC Chair Gary Gensler defended the SEC against accusations of failing to protect investors from having their funds abused by crypto firms like FTX. Gensler, however, did reveal that the commission will take more aggressive enforcement actions against these firms in the future.

The new guidance from the SEC recommends companies disclose cryptocurrency asset holdings and risk exposure to events like the FTX bankruptcy in their public filings.

The SEC’s Division of Corporation Finance leveraged existing findings under the Securities Act of 1933 and the Securities Exchange Act of 1934 to draft a sample letter. The sample—intended to illustrate the type of feedback a public company might receive from the commission—urges companies to disclose “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.”

The letter went on to ask the issuer to outline the impact of bankruptcies on “your business, financial condition, customers, and counterparties, either directly or indirectly.” The sample letter also requested details regarding “any material risk” related “to excessive redemptions, withdrawals, or a suspension of redemptions or withdrawals, of crypto assets” and to “identify any material concentrations of risk and quantify any material exposures.”

The SEC encouraged public companies to consider adopting the suggestions when preparing public filings “that may not typically be subject to review by the Division before their use.”

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