December 22, 2022

Corp Fin Issues Sample Letter to Companies Regarding Recent Developments in Crypto Asset Markets

Era Anagnosti, Melinda Anderson, Colin Diamond, Maia Gez, Danielle Herrick, Scott Levi, Amanda Maki, Michelle Rutta

White & Case LLP

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White & Case LLP In light of the dislocation experienced by the crypto industry in recent months, as demonstrated through a number of highly publicized bankruptcies causing "widespread disruption" in the space, on December 8, 2022, the Division of Corporation Finance ("Corp Fin") of the Securities and Exchange Commission issued a sample letter to companies with disclosure obligations under the federal securities laws asking them to evaluate how the distress among crypto asset market participants may impact such companies' disclosures.¹

Corp Fin directs companies to evaluate their disclosures in light of recent market events to provide investors "with specific, tailored disclosure" explaining how such events and conditions may, directly or indirectly, impact the company's business and the potential impact to investors. In meeting their disclosure obligations, companies should consider the need to address crypto asset market developments in their filings generally, including, more specifically, disclosure of a company's exposure to counterparties and other market participants; risks related to a company's liquidity and ability to obtain financing; and risks related to legal proceedings, investigations or regulatory impacts in the crypto asset markets.

Similar to other recent Corp Fin sample letters where guidance focuses on a materiality-based approach, by noting the need for clear disclosure about the material impacts of crypto asset market developments, Corp Fin has also raised fairly tailored comments, seeking disclosure of, among other things:

Material risks to the business from possibility of regulatory developments related to crypto assets and crypto asset markets;
Material risks resulting from assertion of jurisdiction by US and foreign regulators and other government entities over crypto assets and crypto asset markets;
Material risks a company faces from unauthorized or impermissible customer access to its products and services; and
Steps taken to restrict access of US persons to a company's products and services and any related material risks.

Other notable comments focused on: (i) a company's exposure to counterparties and other market participants that have experienced financial distress or compliance failures; (ii) protective measures taken to safeguard customers' crypto assets and controls in place to prevent self-dealing or conflicts of interest; (iii) whether, to the extent material, crypto assets issued by a company serve as collateral for any other person's or entity's loan, margin, rehypothecation or similar activity and whether the current crypto asset market disruption has impacted the value of the underlying collateral, raising the company's liquidity risk; (iv) risks related to reputational harm from involvement in the crypto market; and (iv) risks related to legal proceedings, investigations or regulatory impacts in the crypto asset markets.

Corp Fin also urged companies to consider the sample comments as they prepare disclosure documents that may not typically be subject to review by Corp Fin staff before their use, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements.

Companies with ongoing reporting obligations should evaluate their direct or indirect crypto exposure and engage in a materiality analysis of such exposure in light of these sample comments. As this Sample Letter reiterates, companies should assess disclosures in their upcoming periodic reports in light of these recent developments and confirm that their reports comply with Rule 12b-20 of the Exchange Act; i.e., disclosure of such further material information necessary to make the required statements, in light of the circumstances under which they are made, not misleading.

For the full text of the letter, see Appendix A.

Appendix A
December 2022

Name
Address
Dear Issuer:

We have reviewed your filing and have the following comments. Please revise or update your disclosure in response to our comments.

General

1. Provide disclosure of any significant crypto asset market developments material to understanding or assessing your business, financial condition and results of operations, or share price since your last reporting period, including any material impact from the price volatility of crypto assets.

Description of Business

2. To the extent material, discuss how the bankruptcies of XX and XX and the downstream effects of those bankruptcies have impacted or may impact your business, financial condition, customers, and counterparties, either directly or indirectly. Clarify whether you have material assets that may not be recovered due to the bankruptcies or may otherwise be lost or misappropriated.

3. If material to an understanding of your business, describe any 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.
Have experienced material corporate compliance failures.

4. If material to an understanding of your business, discuss any steps you take to safeguard your customers' crypto assets and describe any policies and procedures that are in place to prevent self-dealing and other potential conflicts of interest. Describe any policies and procedures you have regarding the commingling of assets, including customer assets, your assets, and those of affiliates or others. Identify what material changes, if any, have been made to your processes in light of the current crypto asset market disruption.

Management's Discussion and Analysis of Financial Condition and Results of Operations

5. Disclose whether you have experienced excessive redemptions or withdrawals, or have suspended redemptions or withdrawals, of crypto assets and explain the potential effects on your financial condition and liquidity.

6. We note that you own or have issued crypto assets and/or hold crypto assets on behalf of third parties. To the extent material, explain whether these crypto assets serve as collateral for any loan, margin, rehypothecation, or other similar activities to which you or your affiliates are a party. If so, identify and quantify the crypto assets used in these financing arrangements and disclose the nature of your relationship for loans with parties other than third-parties. State whether there are any encumbrances on the collateral. Discuss whether the current crypto asset market disruption has affected the value of the underlying collateral.

7. To the extent material, explain whether, to your knowledge, crypto assets you have issued serve as collateral for any other person’s or entity’s loan, margin, rehypothecation or similar activity. If so, discuss whether the current crypto asset market disruption has impacted the value of the underlying collateral and explain any material financing and liquidity risk this raises for your business.

Risk Factors

8. Describe any material risk to you, either direct or indirect, due to excessive redemptions, withdrawals, or a suspension of redemptions or withdrawals, of crypto assets. Identify any material concentrations of risk and quantify any material exposures.

9. To the extent material, discuss any reputational harm you may face in light of the recent disruption in the crypto asset markets. For example, discuss how market conditions have affected how your business is perceived by customers, counterparties, and regulators, and whether there is a material impact on your operations or financial condition.

10. We note that you are not authorized or permitted to offer your products and services to customers outside of the jurisdictions where you have obtained the required governmental licenses and authorizations. Describe any material risks you face from unauthorized or impermissible customer access to your products and services outside of those jurisdictions. Describe any steps you take to restrict access of US persons to your products and services and any related material risks.

11. Describe any material risks to your business from the possibility of regulatory developments related to crypto assets and crypto asset markets. Identify material pending crypto legislation or regulation and describe any material effects it may have on your business, financial condition, and results of operations.

12. Describe any material risks you face related to the assertion of jurisdiction by US and foreign regulators and other government entities over crypto assets and crypto asset markets.

13. Describe any material risks related to safeguarding your, your affiliates', or your customers' crypto assets. Describe any material risks to your business and financial condition if your policies and procedures surrounding the safeguarding of crypto assets, conflicts of interest, or comingling of assets are not effective.

14. To the extent material, describe any gaps your 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 they have made to address those gaps.

15. Describe any material financing, liquidity, or other risks you face related to the impact that the current crypto asset market disruption has had, directly or indirectly, on the value of the crypto assets you use as collateral or the value of your crypto assets used by others as collateral.

16. To the extent material, describe any of the following risks due to disruptions in the crypto asset markets:

Risk from depreciation in your stock price.
Risk of loss of customer demand for your products and services.
Financing risk, including equity and debt financing.
Risk of increased losses or impairments in your 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 you or your affiliates.
Risks from price declines or price volatility of crypto assets.

We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.

Sincerely,
Division of Corporation Finance

^{1 The letter is available here.}

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.