SEC Issues "Sample Letter" Guidance on Disclosure of Crypto-Asset Risks

The SEC's Division of Corporation Finance urged issuers with exposure to crypto-asset markets to evaluate and update their current disclosures to give investors "specific, tailored disclosure about market events and conditions, the company’s situation in relation to those events and conditions," and potential impacts.

The guidance, in the form of a "sample letter," offers a series of questions for issuers to consider in their disclosures, including:

• comprehensive information concerning direct and indirect exposure to crypto-related counterparties and other market participants, including those that (i) filed for bankruptcy, (ii) experienced excessive redemptions, suspended redemptions or suspended withdrawals, (iii) are unable to locate customer crypto assets and (iv) experienced material corporate compliance failures;

• steps taken to safeguard customers' crypto assets and prevent potential conflicts of interest, as well as related policies and procedures;

• material impacts on the company's liquidity and ability to obtain financing in crypto markets;

• information on whether any crypto-assets owned or issued by a company serve as collateral for any loan, margin, rehypothecation or other activities to which the company and its affiliates are a party;

• material risks posed by the possibility of regulatory developments related to crypto-assets and crypto-asset markets; and

• material gaps that the company's board or management have identified "with respect to risk management processes and policies in light of current crypto asset market conditions."

The Division cautioned companies to take the guidance into consideration "as they prepare disclosure documents that may not typically be subject to review by the [Division of Corporation Finance] before their use, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements."