Securities and Exchange Commission releases advisory on cryptocurrency offerings for market participants
The US Securities and Exchange Commission (SEC) has published new guidance aimed at clarifying the application of disclosure requirements for crypto-asset securities issuances. This move comes as part of the SEC's ongoing effort to provide clarity on how federal securities laws apply to the rapidly evolving crypto market.
Key Disclosure Requirements for Crypto Firms
The guidance emphasizes several key disclosure requirements that crypto firms must adapt to. These include:
- Detailed Disclosure about the Business Model: Issuers must provide a clear and comprehensive explanation of their business model, including any material reliance on third parties. Since crypto asset exchange-traded products (ETPs) often depend on third-party service providers, the extent and nature of such reliance, along with associated risks, must be disclosed.
- Information about the ETP Structure: Issuers must explain the structure of the ETP as a trust holding underlying crypto assets and how these assets qualify as securities subject to registration requirements.
- Comparable Transparency: The SEC expects disclosures from crypto asset ETP issuers to be similar to those required for traditional securities, implying expectations for comparable transparency and completeness.
- Financial Statement Requirements: Issuers must provide financial statements consistent with SEC standards, adapted to the nature of the crypto assets held by the ETP.
- Risk Factors: Issuers must contextualize unique aspects of crypto asset holdings and market risks, such as custody, valuation, and price volatility of the underlying crypto assets.
Other Aspects of the SEC's Approach
Beyond these requirements, the guidance also addresses other aspects of the SEC's evolving approach to cryptocurrency regulation. This includes the identification of officers who perform policy-making functions, regardless of their formal roles. Additionally, the business description in a crypto project's S-1 filing must be presented in clear, concise, and understandable language, avoiding overly technical terminology or jargon.
The SEC's evolving approach also includes addressing topics such as meme coins, crypto mining, stablecoins, and the creation of a crypto taskforce. It's worth noting that Commissioner Peirce has previously noted that many cryptocurrency tokens might be investment contracts subject to securities laws at the point of issuance.
The SEC's guidance is an interim step while the SEC Crypto Task Force works on comprehensive guidance. The SEC has also held the first of several crypto roundtables as part of this approach. The SEC has also withdrawn from various legal cases as part of its evolving approach to cryptocurrency regulation.
In summary, crypto firms issuing securities must disclose comprehensive information on their business reliance on third parties, the structure and risks of the crypto ETP, and meet rigorous financial statement and risk disclosure standards consistent with traditional securities regulations under the Securities Act and Exchange Act. This guidance aims to provide clarity and ensure higher standards for transparency for issuers of crypto securities.
[1]: SEC Press Release, SEC Issues Guidance on Disclosure Requirements for Offerings and Sales of Digital Assets, 30 March 2023, https://www.sec.gov/news/press-release/2023-40 [2]: SEC Press Release, SEC Issues Statement on Crypto-Asset Securities Issuance and Trading Platforms, 15 April 2023, https://www.sec.gov/news/press-release/2023-54 [3]: SEC Staff Accounting Bulletin, SAB 121 - Disclosure of Certain Investment Company Guidance, Rescinded, 15 April 2023, https://www.sec.gov/rules/interpretation/2023-55.htm
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