SEC Issues Guidance on Crypto Asset ETP Disclosures

The SEC's Division of Corporation Finance issued guidance to clarify how issuers of crypto asset exchange-traded products ("ETPs") should comply with disclosure rules.

In a statement, the Division said it had reviewed multiple ETP filings and identified several common issues. The Division said that issuers should:

• describe their business operations "in plain English";
• clearly "calculate net asset value ("NAV")," how they handle forks and airdrops and how they managed custody of crypto assets;
• disclose risks that are specific and relevant to crypto markets. The Division stated that issuers should not rely on generic language and include information on risks such as hacking, theft of private keys, price manipulation on trading platforms and the technical vulnerabilities of crypto networks. In addition, the Division highlighted risks from limited liquidity, competition and service provider failures.
• describe their investment objectives, explain how they selected their benchmarks or indexes, and identify each crypto asset's supply, use cases, and consensus mechanism;
• explain whether the crypto assets were held in hot, warm, or cold storage and whether they were commingled with other customer assets;
• name their authorized participants ("APs"), disclose the material terms of AP agreements and file those contracts as exhibits;
• identify any third parties that helped with buying or selling crypto assets and to describe any "conflicts of interest" involving "the sponsor [or] its affiliates."

On financial reporting, the Division said issuers organized as trusts or limited partnerships should file financial statements for the entire entity and for each individual series of securities. The Division also warned that incorrect use of EDGAR filing tags could delay or block required filings.