Last week, the Staff of the Division of Corporation Finance of the Securities and Exchange Commission posted a sample comment letter (see the sample letter) in order to provide guidance to reporting companies regarding the types of disclosures that reporting companies should consider to the extent that a filer has been impacted by a bankruptcy or by the financial distress of a crypto asset market participant.  In its communication, the Staff noted that these recent events have caused “widespread market disruption.”  As a result, some companies may be impacted and should evaluate their disclosures in order to provide investors with appropriate, tailored, company-specific discussions of the impact of such events on the company’s business, operations and future operating results.

To that end, and with a view toward assisting reporting companies, the illustrative comment letter includes sample comments that the Staff of the Division might issue.  The sample comments are intended to trigger a review by filers of their disclosures in advance of year-end filings and prompt them to make necessary changes.  The Staff notes that the comments are not intended to represent an exhaustive list of issues that ought to be considered but rather intended to provide an indication of the types of issues that should be taken into account.  In addition, the Staff notes that these comments should be considered as well in connection with disclosure documents that may not typically be subject to review by the Division before use, such as automatically effective registration statements and prospectus supplements for takedowns from effective shelf registration statements.

The comments address such matters as the following:

• Disclosure of significant crypto asset market developments material to an understanding of the business, financial condition and results of operations;
• To the extent material, how the bankruptcies of XX and XX and the downstream effects of those bankruptcies have impacted or may impact the company’s business, financial condition, etc.;
• If material, the company’s direct or indirect exposures to other counterparties, customers, custodians, or other participants in crypto asset markets known to:  have filed for bankruptcy, been decreed insolvent or bankrupt, made any assignment for the benefit of creditors, or have had a receiver appointed for them;  have experienced excessive redemptions or suspended redemptions or withdrawals of crypto assets; have the crypto assets of their customers unaccounted for;  or have experienced material corporate compliance failures;
• If material, steps taken to safeguard customers’ crypto assets;
• Policies and procedures in place to prevent self-dealing and other potential conflicts of interest;
• Policies and procedures on the commingling of assets, including customer assets;
• Any excessive redemptions or withdrawals, or suspensions of redemptions or withdrawals, of crypto assets and the potential effects on financial condition and liquidity;
• Material risks to the company, either direct or indirect, due to excessive redemptions, withdrawals, or a suspension of redemptions or withdrawals, of crypto assets;
• To the extent material, any reputational harm the company may face;
• Material risks arising from regulatory developments related to crypto assets and crypto asset markets;
• Identify material pending crypto legislation or regulation and any material effects on the business, financial condition, and results of operations;
• Material risks related to the assertion of jurisdiction by U.S. and foreign regulators and other government entities over crypto assets and crypto asset markets;
• Material risks related to safeguarding the company’s, affiliates’, or customers’ crypto assets;
• Material risks to the business and financial condition if policies and procedures surrounding the safeguarding of crypto assets, conflicts of interest, or comingling of assets are not effective;
• To the extent material, any gaps the board or management have identified with respect to risk management processes and policies in light of current crypto asset market conditions as well as any changes made to address those gaps;
• Material financing, liquidity, or other risks encountered related to the impact that the current crypto asset market disruption has had, directly or indirectly, on the value of the crypto assets used as collateral or the value of crypto assets used by others as collateral; and
• To the extent material, describe any of the following risks due to disruptions in the crypto asset markets:  risk from depreciation in stock price; risk of loss of customer demand for products and services; financing risk; risk of increased losses or impairments in investments or other assets; risks of legal proceedings and government investigations, pending or known to be threatened, in the United States or in other jurisdictions against the company or its affiliates;  risks from price declines or price volatility of crypto assets.

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