Securities and Exchange Commission (SEC) issues advisory on cryptocurrency divulgence for token creators

Securities and Exchange Commission (SEC) issues advisory on cryptocurrency divulgence for token creators

US SEC Provides Detailed Guidance for Crypto Firms Issuing Securities

The United States Securities and Exchange Commission (SEC) has published comprehensive guidance on the application of disclosure requirements to crypto-asset securities issuances. This new directive, aimed at crypto firms issuing exchange-traded products (ETPs), underscores the importance of transparent, tailored disclosures that align with existing securities laws.

Detailed Business Description

Issuers must provide a clear, concise, and understandable narrative description of their business, avoiding technical jargon. For crypto asset ETPs, this includes detailed information about the underlying crypto asset(s) and networks, such as the initial development team, methods of generating or mining tokens, transaction validation mechanisms, use cases, and fee structures related to the crypto network or applications.

Identification of Officers and Service Providers

The SEC expects disclosure of key persons involved, including authorized participants, counterparties, custodians, and sponsors. Issuers must identify these third parties and describe any agreements and fee arrangements with them, including custodian policies and sponsor fee calculation methodologies. The degree to which the issuer’s business relies materially on these third parties must be clearly described.

Record of Ownership

As Crypto Asset ETPs are trusts issuing securities listed on exchanges, issuers must maintain and disclose ownership records consistent with securities laws. The emphasis is on transparency and accurate registration of ownership interests in the ETP securities.

Failure Scenarios

While the guidance does not prescribe explicit sections labeled "failure scenarios," issuers are expected to disclose risk factors specific to crypto assets, including market volatility, structural vulnerabilities, cybersecurity risks, and operational risks that could impact business continuity or asset protection. This includes how failures in third-party service providers or underlying networks could affect the issuer or investors.

Regulatory Evolution

The SEC's evolving approach to cryptocurrency regulation includes rescinding SAB 121, providing guidance on meme coins, crypto mining, stablecoins, creating a crypto taskforce, hosting crypto roundtables, and withdrawing from certain legal cases. Commissioner Peirce has previously noted that many cryptocurrency tokens might be investment contracts subject to securities laws at the point of issuance.

In summary, the SEC’s 2025 guidance for crypto firms issuing securities (especially ETPs) centers on detailed and non-boilerplate disclosures about business operations, key personnel and third-party relationships, ownership structures, and comprehensive risk factors including failure risks. These aims promote investor protection and regulatory compliance by adapting traditional securities disclosure frameworks to the specifics of crypto asset offerings.

This guidance is an interim step while the SEC Crypto Task Force works on comprehensive guidance. Securities laws require a record of ownership, and the issuer must disclose where that record is held, which could prove challenging during secondary market trading. The transition of cryptocurrency tokens from investment contracts to commodities is yet to be clearly defined.

Sources: 1, [2], [3], [4]

1. The guidance provided by the US Securities and Exchange Commission (SEC) stresses the importance of clear, concise, and understandable business descriptions for crypto asset exchange-traded products (ETPs), which should detail insights about the underlying crypto assets and networks, such as stablecoins, initial development teams, and fee structures.
2. In addition to business descriptions, the SEC expects issuers to disclose information about key service providers involved in crypto ETP operations, like authorized participants, counterparties, custodians, and sponsors, including any agreements and fee arrangements with them.
3. Maintaining and disclosing record of ownership in compliance with securities laws is mandatory for crypto asset ETP issuers, with an emphasis on transparency and accurate registration of ownership interests in the ETP securities.
4. The SEC's regulatory evolution has included a focus on failure scenarios for crypto asset offerings, requiring issuers to disclose risk factors specific to cryptocurrencies, including market volatility, cybersecurity risks, operational risks, and risks associated with third-party service providers or underlying networks.

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