SEC Wants Firms to Report Impact of Crypto Bankruptcies, Excess Withdrawals
On Thursday, December 8th, the Security and Exchange Commission’s Division for Corporate Finance posted a sample letter for companies concerning the “recent developments in crypto asset markets”. The sample has multiple requirements with some of the stand-outs including the disclosure of crypto assets, and effects of recent bankruptcies of “XX”.
SEC Releases New Guidelines on Digital Asset Reporting
In response to the recent turmoil in the cryptocurrency sector, SEC’s Division for Corporate Finance recently issued a “sample letter” containing new guidelines for digital asset reporting. According to the Commission, while the list it provided is far from exhaustive, it is nonetheless strongly urging companies to take its suggestions into consideration when submitting a report:
The sample comments do not address an exhaustive list of the issues that companies should consider. As always, companies should evaluate whether they have experienced or may be affected by matters characterized as potential risks and, if so, update their disclosures accordingly. Any comments issued would be appropriately tailored to the specific company and/or transaction, and would take into consideration the disclosure that a company has provided in Commission filings or otherwise made publicly available. The Division urges companies to take these sample comments into consideration as they prepare disclosure documents that may not typically be subject to review by the Division before their use, such as automatically effective registration statements and prospectus supplements for takedowns from existing shelf registration statements.
Selected examples include the disclosure of cryptocurrency holding and the overall exposure to the digital asset market and entities that themselves have significant exposure to cryptocurrencies. The SEC is also interested in “excessive redemptions or withdrawals”, as well as any suspensions of withdrawals and redemptions. Perhaps the point most directly associated with the recent collapse of FTX is the request to “discuss how the bankruptcies of XX and XX and the downstream effects of those bankruptcies have impacted or may impact your business”.
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The Collapse of FTX and the Role of the SEC
While the SEC has been very active in regulating cryptocurrencies throughout 2022—and has been receiving a lot of flak for its efforts—its efficacy came under increased scrutiny in the wake of the collapse of FTX. The questions of whether the Commission did enough to protect investors with regard to SBF’s companies particularly intensified after the exact extent of political donations made by the former billionaire came to light. Furthermore, the comments made by the current CEO of the exchange—the man who oversaw the bankruptcy of Enron—that FTX is, in fact, worse than Enron further eroded public confidence in regulators.
Congressman Tom Emmer, a long-standing and vocal critic of the SEC’s Chair Gary Gensler, was quick to provide his assessment. According to the Representative, the collapse of FTX was a failure of centralized finance and of regulators, and not of digital assets and DeFi. It is, however, important to note that Emmer was one of the congresspeople that blocked an SEC probe of FTX in March 2022.
Among cryptocurrency companies, none has been more critical of SEC’s behavior in the wake of FTX than LBRY. LBRY recently lost a case against the Commission over its LBC tokens—a case that might have set a precedent as the token was declared a security despite never being a part of an ICO. While the company’s tone and frequency of comments are likely influenced by the fact that the ruling was made shortly before FTX collapsed, it is in many ways echoing the concerns of a significant portion of the crypto community.
Do you think the new guidelines will help the SEC protect investors more efficiently with regard to digital assets? Let us know in the comments below.