SEC issues new guidance on cryptocurrency risk disclosure

Under the new guidance, companies will have to include crypto asset holdings as well as their risk exposure to the FTX bankruptcy and other market developments in their public filings

The Securities and Exchange Commission released new guidance Thursday, requiring companies that issue securities to disclose to investors their exposure and risk to the cryptocurrency market.

The guidance comes about a month after FTX, one of the world’s largest cryptocurrency exchanges, filed for bankruptcy after loan customer funds to a risky trading company that was founded by FTX’s former CEO Sam Bankman-Fried. Over 100,000 customers were affected by the exchange’s failure.

On Wednesday, SEC Chair Gary Gensler fended off accusations that the agency has failed to prevent crypto firms from misusing customer funds. Gensler also said the SEC would take more enforcement actions if the firms fail to comply with existing rules.

Under the new guidance, companies will have to include crypto asset holdings as well as their risk exposure to the FTX bankruptcy and other market developments in their public filings. The company’s bankruptcy filings indicate the company has over 1 million creditors.

The SEC’s Division of Corporation Finance developed a sample letter after a selective review of findings made under the Securities Act of 1933 and the Securities Exchange Act of 1934, which directs companies to disclose ‘such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading,’ according to the guidance.

A suggested item within the letter asks the issuer to describe how company bankruptcies and subsequent effects ‘have impacted or may impact your business, financial condition, customers, and counterparties, either directly or indirectly.’ Another asks for a description of ‘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.’

The SEC’s corporate finance division encouraged companies to adopt these recommendations as they prepare documents that may not typically be subject to review by the Division before their use.’

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