SEC Clarifies Crypto Disclosure Rules
"The Division's statement is not a definitive how-to guide for the come-in-and-register invitation that befuddled so many in recent years. Rather, it is a small step in identifying relevant disclosures so that investors have material information about the projects and businesses in which they are investing."
Hester M. Peirce, SEC Commissioner
"The Division's statement is not a definitive how-to guide for the come-in-and-register invitation that befuddled so many in recent years. Rather, it is a small step in identifying relevant disclosures so that investors have material information about the projects and businesses in which they are investing."
Hester M. Peirce, SEC Commissioner
The SEC Division of Corporation Finance ("Division") released a statement on how existing disclosure requirements apply to crypto-related securities offerings and registrations.
In consideration of the Crypto Task Force efforts "to develop a comprehensive and clear regulatory framework for crypto assets," the Division's addressed registration and disclosure requirements including the following:
- Description of Business. The Division emphasized that Issuers should provide a clear, "narrative description of the material aspects of their business," disclosing only information material to understanding the business as a whole and avoiding overly technical language. The Division also said Issuers should provide a "narrative description of the purpose of the network or the application, and its operation," including key development details.
- Risk Factors. The Division reminded Issuers that disclosure of material risks must reflect the nature of the business and the particular features of any associated crypto asset. The Division stated that risks may include "price volatility, limited rights of holders, valuation and liquidity risks, technological risks, cybersecurity risks, business, operational, and network risks, and legal and regulatory risks."
- Description of Securities. The Division said Issuers should provide a "materially complete description" of the security being offered or registered. The Division highlighted the need to describe "how the rights of holders and characteristics of the security are memorialized." The Division also said particular attention should be given to the technical features of the asset, including "how the security or subject crypto asset can be accessed, held and transferred, redeemed, retired, or burned."
- Governance and Key Personnel. The Division highlighted that SEC rules require disclosure of those "entrusted with the management of the issuer," including executives and significant employees. The Division said that this also includes individuals or third parties who "perform policy-making functions typically performed by executive officers," such as sponsors in the context of crypto-related trusts.
- Financial Statements. The Division reaffirmed that financial statements must meet applicable SEC requirements and encouraged issuers to consult the SEC for questions involving "unusual, complex, or innovative transactions."
- Exhibits. The Division said issuers are expected to file "any instrument defining the rights of security holders" as part of their registration materials. In the crypto context, this may include the smart contract code or network protocols that memorialize those rights.