SEC Provides Clarity on Disclosure Rules for Crypto Asset Securities Offerings

The U.S. Securities and Exchange Commission’s Division of Corporation Finance today issued its views on how existing federal securities laws apply to disclosures for companies offering crypto asset-related securities, aiming to provide greater clarity in the rapidly evolving market.

The staff statement addresses common disclosure issues observed during reviews of registration filings under the Securities Act of 1933 and the Securities Exchange Act of 1934. It covers offerings involving equity or debt from companies whose businesses relate to crypto networks or applications, as well as crypto assets offered as part of investment contracts.

This guidance comes on the heels of the U.S. Senate confirming digital asset lobbyist Paul S. Atkins as the next chairman of the SEC, and as the SEC’s recently formed Crypto Task Force works toward developing a comprehensive regulatory framework. The Division stated it was providing its views now to assist market participants navigating current requirements during those ongoing deliberations. The statement emphasized that these are staff views, not new rules or official statements from the Commission itself.

“The disclosures required … protect investors, facilitate capital formation, and promote fair, orderly, and efficient markets,” the Division noted, highlighting that some crypto asset market issuers have already registered offerings.

Key areas addressed include the description of business. The staff stressed the need for clear, concise language, avoiding excessive jargon. Disclosures should be specific to the issuer’s actual business, detail the current development stage, outline future plans, and be consistent with public statements like white papers. For issuers developing networks or applications, the staff expects detailed descriptions of the purpose, technology (including architecture, consensus mechanisms, transaction validation), development milestones, funding sources, governance, and security measures.

Regarding risk factors, the guidance reiterated the need to discuss material risks specific to the investment. Examples cited included risks tied to the issuer’s planned operations, technology, cybersecurity, implementation challenges, reliance on other networks, and the unique characteristics of the security itself – such as price volatility, limited holder rights, valuation challenges, liquidity issues, and custody risks. Potential legal and regulatory hurdles, like needing to register under money transmission laws or with other regulators, such as the Commodity Futures Trading Commission, were also highlighted as relevant risk factors.

The statement delved into the description of securities, particularly for crypto assets deemed part of an investment contract (“subject crypto assets”). Issuers should provide materially complete descriptions, covering holder rights, and lack thereof, regarding dividends, voting, liquidation, and how these rights are memorialized and transferred. Technical specifications are crucial, including details on the associated network, code modification possibilities, requirements for holding and transferring the asset (wallets, keys), where ownership records reside, divisibility, and results of any third-party security audits. Rules governing the asset’s total supply, minting or burning processes, vesting schedules, and any market-making arrangements should also be disclosed.

The Division also touched upon standard disclosures for directors, executive officers, and significant employees, noting this could extend to key third parties performing policymaking functions, such as sponsors of exchange-traded products. It confirmed standard financial statement rules apply and reminded issuers they might need to file instruments defining security holder rights as exhibits – potentially including smart contract code if it defines those rights.

The staff encouraged issuers to tailor disclosures to their specific facts and circumstances and reminded them that scaled disclosure accommodations might apply to smaller companies.